With no end in sight to the soft market, the question thatagency leaders must ask themselves is: “Are we going to playoffense or defense?” The answer is going to depend on the agency'ssituation, and everybody's situation is different.

For the public brokers, they must maintain their earnings orthey will be penalized by Wall Street. Therefore, they will turn toacquisitions to drive earnings growth and focus on cost containmentstrategies. Private equity firms are also under pressure togenerate the same level of earnings to satisfy the returns promisedto their investors.

However, privately held agencies with no debt are in a muchdifferent position. In fact, they have a tremendous amount offreedom and can develop a strategy to capitalize on the softmarket.

During downcycles in business, leaders across all industriesoften turn to a strategy of playing defense, which includesmultiple cost-containment strategies such as headcount reductions,hiring freezes and the suspension of discretionary spending.

The focus of playing defense is maintaining currentprofitability at lower revenue levels. The challenge with thisstrategy is implementing it while maintaining customer servicelevels and the ability to grow your revenues in the future.

This is especially true in our industry. We are seeing lots ofdefense being played in the insurance distribution arena–cutbacksin advertising, program development, new producer hiring, bonuses,profit-sharing, professional education and professionaldevelopment.

The question that leaders must ask themselves is this: Whilethese cost reductions help maintain the profitability of thebusiness, what effect does playing defense have on the firm'sability to create value in the future? For example:

o If an agency decides to cut back efforts in new programdevelopment, is it compromising its ability to drive growth in thefuture?

o Does eliminating or scaling back bonuses and profit-sharingdiminish the morale of employees and result in lower levels ofproductivity or customer service?

o If an agency stops investing in new producers–the lifeblood ofa growing firm–where will future growth of the agency comefrom?

Playing defense isn't all bad, and good expense management is ahallmark of a successful agency. However, there are opportunitiesto play offense in a soft market that will allow you to grow andbuild the agency in the soft market and beyond.

An agency with a strong balance sheet (no debt, significant cashbalances, etc.) is uniquely positioned in a soft market to playoffense. For some, this is a difficult concept to grasp becauseplaying offense likely means some short-term dips inprofitability.

However, these short-term dips can translate into long-termgains, increasing the agency's revenue and profitability and value.Here are four offensive strategies to consider in the current softmarket:

o March On. Many agencies have developed detailed business plansthat paint a clear picture of the future of their agency. Often,these plans are the result of intense thought and input at alllevels of the organization, and are at the forefront of the mindsof the employees each and every day.

Would deviating from these plans create a disruption anddistraction to the agency? If there is a lot of confidence in andcommitment to the plan, why is a deviation necessary?

Insurance is like many other industries–it experiences cycles.As a result, many leaders in this industry are seasoned veteransand have seen both hard and soft markets. They know that the softmarket will bring some short-term profitability challenges.

The most successful have also built the business for the longterm, understanding that cycles come and go. The key to success isnot to panic, but to keep executing and stay on strategy.

o Keep Competing. A soft market is a great time to compete onnew business. Further, in this macro-economic environment, clientsare feeling stress and evaluating their own organizations. Giventhese two factors, getting in front of a prospective client may notbe as tough as it has been in the past.

Therefore, agencies should seize every opportunity to interactwith current or prospective clients. The agencies that do not playoffense and show signs of complacency will face a strong challengefrom those that do choose to be aggressive.

o Keep Investing. Continuing to invest during a soft market isthe key to exiting the downcycle as a stronger agency. There aremultiple opportunities for investments, each of which can drive thegrowth of revenue and profitability in the long term. Of course,the issue is that there may be a hit to earnings in the shortterm.

As mentioned previously, new producers are the lifeblood of agrowing agency. In fact, in evaluating agencies we feel that a NetInvestment in Unvalidated Producer Pay (NUPP) of 1.5-to-3.0 percentof net revenues (or potentially higher) is a healthy level ofinvestment in an agency's growth. Therefore, if an agency abandonsthis investment, their ability to grow in the future will likely beharmed.

There is also an opportunity to invest in your clients. Thisinvestment can take many forms, including adding or enhancingvalue-added services offered to clients.

Those who are playing defense will probably not be inclined tomake these investments. Therefore, there is a real opportunity todistinguish yourself from some of your competition.

o What's New? Another offensive strategy is to find new thingsto bring to market that will help you differentiate yourself. Arethere new products or services that you can introduce? New marketsyou need to add that will allow you to pursue new clients or serveyour existing clients better? New hiring and recruiting strategiesyou can use that will allow you to attract more talent?

Each of these strategies must be well thought-out and planned.Aggressive spending without an eye toward the long-term benefitscan be detrimental to an agency, especially if the benefits nevermaterialize. If you decide to play offense, you must evaluate thereturns of your investment in the form of increased revenue andprofitability.

The market will improve, and when it does, future success willbe impacted by what you do today. Some of the best times to take astep forward are when your competitors are taking a stepbackward.

Those agencies that play offense and are built for sustainedrevenue and profitability growth will be the ones that exit thesoft market in a stronger competitive position and with a higherfirm value.