Organic Growth Success Should Be a Key Initiative for 2008

Transparency, disclosure, and private equity interest reshape how high growth agencies do business

As agents and brokers embark upon the strategic planning process for 2008, organic growth initiatives remain at the forefront for the nation’s fastest growing organizations. Such organizations are not complacent upon past growth success, but are instead seeking solutions to continue maximizing predictable and sustainable future growth. They are dissecting past performance and leading a cultural revolution centered on executive level leadership, accountability, and oversight. Gone are the days of complacency, mediocrity and simply telling producers to sell more. Now more than ever, high growth agencies are revamping their culture to proactively ensure uninterrupted growth success. And that cultural shift begins with executive-facing, leadership initiatives … not simply producer-facing mandates.

Two things have happened recently that are reshaping how high growth agents are conducting business. The first is centered on transparency and disclosure. The second is the understanding of why private equity firms are so attracted to the insurance business.

Service Timeline Agreements

Whether driven legislatively or by consumers, transparency and disclosure will become inevitable. It is no longer a matter of if, but when. High growth agencies have embraced transparency and disclosure as they are comfortable with the service to value proposition they provide the insured. They are not idly waiting for federal or consumer mandates.

Instead, they are seizing the opportunity to proactively design, implement and manage service timeline agreements with insureds. The service timeline agreements serve as a defined customer contact strategy quantifying the ongoing relationship between the agency and the insured. Notice that service timelines serve first and foremost as a “defined customer contact strategy.” Many of the service timeline activities are things the agency is already doing for customers, but simply failing to articulate, including:

• Phone calls and e-mails returned within 24 hours
• Loss runs
• Claims reviews, and
• Renewal meetings.

Value-added services need not be viewed as large investments in people and technology, but rather the communication of services that are already provided to customers.

High growth organizations are being proactive in designing and delivering service timelines. The benefits reside in solidifying current accounts to mitigate competitive incursions while articulating new business differentiation platforms to drive new business production, regardless of the complexity of the service program.

While very few high growth organizations maintain what we would deem a fully functional process to monitor and govern promises made to consumers, what they do have in place far exceeds that of the average agency. While the processes and procedures are still being built, over 80 percent of agencies that have a service timeline process report have competitive advantages with respect to retention and new business.

For example, a typical service timeline process has historically been defined as:

A producer speaks to a prospect and conducts some type of risk-based needs assessment. That producer will then come back to the office and ask an account executive to document all the services the organization promised to the client over the next 12 months. The account executive then creates a simple Microsoft Word or Microsoft Excel document, lists the promises, saves it on the hard drive, then prints and send to the insured.

Great start, but let’s discuss the problems.

1. As the document is saved on one individual’s hard drive, there is no common platform for others involved in the service timeline to access roles, responsibilities, and the status of the promises.
2. Account executives are designing their own timeline; the agency loses all semblance of corporate consistency relative to branding.
3. The execution of promises made becomes a reactive process versus a proactive process as one individual has to remember to periodically look at the timeline, activities, and due dates.
4. There is no executive level oversight to participate in the process by governing compliance and client delivery.
5. There is no embedded process to ensure that the services being provided coincide with the account commissions. The agency loses the ability to manage internal time, cost and account profitability.
6. There is no system to mandate the communication of results back to the client.

Despite the fact that an incumbent agency is providing service timeline agreements on the front end, they consistently fail to mandate a stewardship report on the back end to illustrate that the promises made were actually kept. Several accounts have been lost to the competition for this reason. Too many relationships are taken for granted. The list of problems goes on and on.

The moral of the story is that despite a broken process, high growth organizations are still realizing success because they are proactively doing something versus nothing. But remember, high growth organizations are not complacent. They want to continue building out the service delivery process in an effort to maximize predictable and sustainable high growth. As such, they are investing in technology that supports the service delivery process, yet is simple and effective to use. Despite the fact that they have been using service timeline agreements for years, they have also spent the last 12-18 months formalizing the processes and procedures to help agency personnel execute the program while maintaining the comfort level that promises made will be kept. These processes incorporate various internal parties into service delivery so producers can focus on new business while others manage the day-to-day servicing of the account.

In an age of soft premium rates, paltry organic growth, transparency and disclosure, a focus on capturing market share and consumer desire for specialists versus generalists, service timeline agreements afford a great opportunity to solidify retention while driving new business. Those agencies proactively embracing service timelines are well-established to continue high growth.

Within the next two to four years, service timelines will be the norm, not the exception. The decision to be made is whether you want to be proactive or reactive in embracing this initiative. Reactive agents and brokers will lose accounts, revenue and earnings before they awaken. Proactive agents will continue high growth success.

Private Equity

While consolidation is nothing new to the insurance distribution network, 2007 has seen eight of the top 100 brokers change ownership. We have seen USI, Hub and Alliant sell to private equity firms. We have also seen Higginbotham, Bank of America and William Rigg sell to public brokers. Twelve months ago, we predicted that 15 of the top 100 brokers would either sell or entertain offers this year. That number has become reality. And one of the main drivers is the private equity desire to more fully penetrate this space with a plan to implement best practices growth strategies.

To support this notion, consider that over $4.5 billion of private equity money has been invested in insurance agents and brokers during 2007 alone.

Also consider that a number of private equity firms, including Edgewood Partners, Synercon, and Ascension were formed this year to target middle market agents and brokers having between $8 million and $100 million in agency revenue. Behind the scenes, a host of others are looking to allocate capital in the insurance brokerage business.

Private equity firms are attracted to this space for a host of reasons, including minimal cost of capital relative to other investment options, cash flow, the assumption of risk by carriers versus agents, and high retention rates. But what do they think they know that others in the industry do not?

First, as astute and savvy investors, they know how to leverage acquisitions with debt to increase the potential internal cash rate of return. While most financial metrics indicate that a typical transaction will net the buyer a 15 percent to 18 percent IRR (internal rate of return), private equity firms can realize upwards of 25 percent IRR through debt leverage.

The second and more important investment strategy revolves around implementing and executing world-class sales practices. Practices that have become commonplace in just about every industry seem to have somehow avoided much of the insurance brokerage business.

Please keep in mind that private equity firms do not purport to understand the every day intricacies of the insurance business. As a matter of fact, just about every private equity investment is rooted in keeping insurance executives to run the daily operations. What the investment houses do understand, however, are the fundamental business principals that drive financial success. Toward that end, they are implementing executive level accountability metrics and practices that will then funnel down through the rest of the organization.

One such accountability practice relates to new business prospecting and sales tracking systems. This is nothing new for organizations in pharmaceutical, manufacturing, or retail sales. Sales professionals in these industries consistently track prospects, calls, appointments, proposals and commissions sold. Executives continually monitor these activities not to baby-sit the sales staff, but rather to actively assist sales professionals in any area necessary and to adequately forecast organizational financial performance. The goal is to identify where sales professionals excel, where they need improvement (prospecting, closing, etc.) and then provide the resources necessary to maximize the potential for individual, and thus organizational, success.

Part of this equation is that executives hold everybody in the organization responsible for success. Sales professionals will be held to new business production standards through the carrot and stick approach. They will be greatly rewarded for exceeding expectations, but punished for underperformance. Service personnel will be held accountable for retention metrics and the execution of service commitments. Sales manager compensation will be more closely tied to the achievement of predetermined growth hurdles. Executives will be held accountable for providing the support resources necessary for employees to perform their job so that the entity continues to control their future. In high growth companies, individuals will get paid for what they do, not for what they are supposed to do. And organizations will not only implement negative consequences for underperformance, but will enforce those consequences.

Lest you think that private equity firms plan on knocking heads, cutting people off at the knees and overturning the apple cart, think again. They are firmly committed to investing the capital necessary to buy accountability technology; recruit, hire and retain personnel; invest in differentiation processes; and reward achievement. What they mandate in return is sound performance where people get paid for results, not responsibilities.

Whether the investment strategy proves fruitful is yet to be seen. But, the lesson to be learned by insurance agents and brokers reverts back to running a business, not a place of employment. Private equity firms have a plan to lead growth, the systems to hold individuals accountable, a known exit strategy and the willingness to make capital allocations based on maximizing long-term value versus tomorrow’s earnings.

Summary

As you continue to plan for 2008, the beginning of the year is an opportune time to lead the organic growth charge. Change is not bad. When led properly, all stakeholders of the organization win.

Two areas to focus on are embracing transparency and disclosure through the proactive implementation of a service timeline platform, as well as implementing accountability and control processes to help everyone in the organization maximize predictable and sustainable growth.

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