"The Stag Looking Into the Pool," by Aesop: A stag, drinking at a clear pool, admired the handsome look of his spreading antlers, but was very unhappy with the slim and ungainly appearance of his legs. "What a glorious pair of branching antlers!" he said. "How gracefully they hang over my forehead! What an agreeable look they give my face! But as for my spindly legs, I am quite ashamed of them." The words were scarcely out of his mouth when he saw some huntsmen and a pack of hounds coming toward him. His despised legs soon placed him at a distance from his followers, but when he entered the forest, his antlers got tangled at every turn and the dogs soon reached him. "Mistaken fool that I was!" he exclaimed. "Had it not been for these wretched antlers my legs would have saved my life."

Moral: People often don't know their own strengths and weaknesses.
Do you know your strengths from your weaknesses–in other words, do you understand what's generating profits and what isn't? Many agency owners don't and even emphasize the very practices that are costing them money. An agency's true strengths are not always obvious. Here are a few issues to consider when sizing up the underpinnings of your agency's success, or possible lack thereof.
o Small accounts and personal lines. Many agencies eliminate small accounts and even personal lines, because they believe they're either unprofitable or chronically stagnant. This can be a huge mistake. When a personal-lines department is well-managed, it can easily be the most profitable unit in the agency. Personal lines' profit margins are often double and sometimes triple those of commercial lines. For example, $500,000 of personal-lines business written at a 30% profit margin produces $150,000 in revenue, the same as $1 million in commercial lines on which an agency earns a 15% profit margin. Who cares if the personal-lines book is smaller or grows more slowly than commercial lines? If the agency is managing that department properly, it can be twice as profitable as other operations. Sharp agencies recognize this potential and build on it.
The same goes for small-commercial departments. Numerous agencies have opted to create a small-accounts department and staff it with less-experienced personnel and provide no producer help. As I wrote last month, this can be a really bad move because it almost certainly ensures more E&O exposure (often much more), poor customer service and the slow deterioration of the book. Agencies can develop small-accounts departments that are twice as profitable as the regular commercial department; it just takes more effort. Agencies often find they can grow these departments, because their costs to write these accounts are less than their competitors'.
Too many agencies view their personal-lines and small-accounts departments the way the stag regarded his legs. They might instead be thought of as an agency's strongest components. They can provide the extra profit required to develop commercial producers, invest in growth and pay bonuses.
o Producers and owners. Many agency owners overwhelmingly attribute their success to their producers, when it may actually be due to some other advantage, such as the right group of carriers or even a rainmaker owner.
Let's consider the rainmaker for a moment. Wherever the owner goes, he or she makes sales. The owner can't handle all this business personally, so he or she gives leads to others. The producers then take credit, firmly believing they were the key to writing those accounts. The owner may also take credit (at least mentally), resulting in multiple people feeling they've achieved success–and maybe not feeling as hungry as they should. Sooner or later, agency growth will plateau.
The agency's strength lies in the rainmaker's ability to obtain leads and the producers' ability to close the deal. In other words, the strength is the team. Therefore, the agency should foster a team spirit and discourage individual producers from preening. My experience has been that fewer than half of all producers are profitable in and of themselves, so to automatically assume they're an agency's strength can be dangerous.
o Companies. Plenty of agencies are growing by writing business with unstable companies that are under-pricing the market. It doesn't take any special ability to do that. In fact, such an agency will be handicapped when that carrier changes course, as it almost certainly will, or even goes under. A reliance on unstable companies should be regarded as a weakness, not a strength.
o The economy and the soft market. Lack of growth is often blamed on a poor economy or a soft market. I've heard the following a thousand times: "There's no new business to write in this town!" As far as I know, there are no laws against writing business in the next town. The weakness is not the economy–it's the agency's inability to maintain sales or expand its territory. Insurance agencies are among the most fortunate of businesses, because there are no natural limits to their potential. Each has a tiny portion of the market and can always capture more.
o Employee benefits. Many agencies and even large corporations mistakenly believe that generous employee benefits programs contribute more than they really do to performance. Instead, the situation in almost every case is that the agency has had extraordinarily high profits and decides to spend some of it on its employees. This is a great thing to do, but agency owners and managers should remember that, for the most part, profit margins lead to benefit programs, not the other way around. Believing that benefits programs are a big driver of success can actually lead to deteriorating profits. (For a case history, see IBM.)
Know and invest in what's really important to your success. When the dogs of the soft market are nipping at your heels, do you want a beautiful rack or fleet legs?
Chris Burand is president of Burand & Associates LLC, an agency consulting firm. Readers may contact Chris at (719) 485-3868 or by e-mail at Chris@burand-associates.com.

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For The Manager: The importance of knowing what's really profitable

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