What web-based strategies help agencies achieve growth?

Demmie Hicks: No growth strategy is more important than emerging in the dialogue of the marketplace. Create a blog, which allows agencies to push the thinking out and invite commentary back in. Social media adds fuel to this conversation: First, by amplifying what an agency has to share, then by sparking others to share, too. The question is, where does this dialogue lead? In the intermediate term, it elevates the position and reputation of the agency; a business that has something to say and inspires others to communicate is seen as a contributor of value. In the long term, it prepares the agency for what mega-investor John Doerr calls the coming “third wave” of the Internet–a new model “that's all about people and places and relationships.” Agencies that fail to prepare for change or even fail to stay current will find themselves left behind.

Patrick Linnert: The two most prevalent strategies right now are pipeline management systems and service timeline platforms. A third and emerging trend is the evolution of e-commerce.

Pipeline management systems help organizations track individual prospects through the various stages of the sales cycle to maximize closed business. Such systems provide a consistent focus on outstanding prospects, the ability to track the activities and behaviors that lead to sales success, and a mechanism to forecast new business expectations by organization and individual. More than 60 percent of high-growth agents report having a pipeline system.

Service timeline technologies govern the service commitment of the relationship by warehousing each customer commitment, the responsible parties and target dates for completion. The web-based applications then send out proactive service reminders and reports for upcoming activities while providing compliance audit reports (by account, department, individual or agency) for past activities.

Finally, from a website perspective, most agents are stuck in a “brochure ware” model. The agency website talks ad nauseam about the agency while rarely addressing the customer. Growing agencies realize two things that most others do not:

1. Websites need to be customer centric. Consumers do not necessarily care about the agency. What they really care about is how the agency can benefit them as the consumer. Thus, agency web verbiage must clearly articulate the agency's value proposition to the customer.

2. Leading agents are migrating toward more interactive portal sites wherein A) prospects can, at minimum, access purchasing information, and B) clients can efficiently access account-specific information.

What strategies do you suggest for agents to survive the bad economy and achieve growth in a soft market?

Tom Doran: Organic growth in this market is very tough to come by, even for very well-run agencies. To a large extent, many agencies are waiting out the storm, as there are limits to short-term strategies to overcome these macro issues. Today, we see organic growth industry-wide at 1 percent. Agencies that are doing better than average tend to have one or more of the following qualities:

1. Dynamic sales culture: Agencies that have historically invested in a steady stream of young producer talent and with a high degree of producer accountability are doing far better than their counterparts.

2. Specialty practice groups and niche business offerings that offer a real competitive advantage with competing agencies.

3. Geographic good luck: There are pockets of the country (Florida, Michigan, Nevada, Arizona) that are bearing far more than their fair share of the economic downturn. In these areas, which are heavily dependent on real estate, heavy industry, construction and recreation, organic growth for the past 18 months have been virtually impossible for most.

Hicks: If you're focusing on the bad economy, you're focusing on the wrong thing. We all need to be focusing on the agency because we are all in the “new normal.” One client wrote me recently, “This is the market we will be living with from now on, and we need to find ways to be successful in it.” For leaders who are having a hard time weathering the transition–not the storm, but the transition–it's time to fix what's wrong with the organization and begin differentiating in the marketplace. It's time to get people aligned around a vision and engage them in collective effort to reach that vision. So many of our agency clients are growing in these tough times because they've mastered these fundamental steps.

Linnert: When we think about top line revenues, there are many factors not in the direct control of agents: investment income, miscellaneous income, supplemental income, rates and exposures. Thus, there exist only two fundamental strategies for driving organic growth:

1. Acute focus on new client acquisition

2. Increase retention in the face of heightened competition.

With average organic growth rates ranging between -47 percent and 4.5 percent, the primary difference between average and high-growth agencies is the amount of new business production written. While revenue retention is indeed critical, retention rates remain fairly consistent across all agencies. High-growth agencies consistently write 70 percent to 100 percent more annual new business than their average agency counterparts. Under the same accord, agency owners repeatedly state that the single largest obstacle to commission and fee growth is non-performing producers. Toward that end, high-growth agents establish annual minimum new business requirements backed by negative consequences for nonperformance; implement minimum commission account thresholds under which producers do not receive renewal commissions on account; leverage pipeline management systems; annually review books of business and trade downs to create sales capacity and invest in sophisticated service personnel to support sales and retention efforts.

From a retention perspective, high-growth agencies realize an additional 1 percent to 2 percent revenue retention versus peers. They do this by developing proactive customer contact strategies catered to the top 20 percent of the accounts based on commission size. Despite the fact that consolidation continues, there exists increasing competition for accounts as agents simply are not growing with current clients. The result is agents focusing on new product lines, expanding the target account size and expanding into new geographic territories.

Are the agencies you work with well-positioned for perpetuation?

Linnert: In general, our clients are well-positioned to perpetuate. Roughly half of our agency relationships stated in a recent poll that there is a greater than 50 percent change the agency will perpetuate internally. MarshBerry believes that the biggest challenge is that most agencies do not have a formalized plan to perpetuate.

Perpetuation is a continuous transfer process. And stock is just one of three pillars upon which perpetuation is founded. In addition to the stock transfer, executives also must perpetuate the leadership of the organization as well as the relationships (clients, carriers, vendors, new business sales, etc.)

According to our relationships, the largest obstacle within the perpetuation plan itself is financial issues (34 percent of respondents) and lack of candidates (19 percent). And even though many agencies may have the financial wherewithal and people to perpetuate, they lack the executive level commitment to start executing a plan as a long-term and consistent process.

Hicks: Most of our clients have established their financial model, so they know what it will take to perpetuate the firm financially. What's lacking for some of them, however, is the next generation of producers and leaders who will fund that model. And since agency successors will likely come from the producer side, agencies are sales organizations, after all. Recruiting and developing young producer talent is critical. Fortunately, most of our clients do an exceptional job developing their leaders by involving them in execution of the agency's strategic plan. Working in collaboration with colleagues around the execution of a plan is a great form of leadership development; it's like on-the-job training. The plan is clay, and key people within the agency learn a lot by shaping it.

Doran: It depends. We recently released the Private Ownership Study which provides a good sense as to the perpetuation readiness in the industry. We surveyed over 900 firms and found:

? A vast majority (more than 80 percent) expressed a high commitment to private ownership.

? Given the cash-flow realities of internal ownership (buyers are generally heavily reliant on agency profits to help meet the financing obligations they take on as buyers), the current economy, soft market and the uncertainty regarding healthcare reform, profits (and a lack of growth in profits) is marking internal perpetuation harder than ever.

? Although a majority of agencies say they are committed to internal perpetuation, more than 53 percent of agencies in the study indicated that selling shareholders are unwilling to take a discount to what they could receive if they sold to a third-party buyer. This is potentially a problem. For a number of reasons, third-party buyers can and do generally pay significantly more for an agency than the internal buyers can afford to pay.

? Seller financing (rather than back or outside financing) is still the norm; more than two-thirds of the agencies in the study indicated sellers take their money, when they sell out, over time.

? A majority of the agencies in the study indicated 100 percent (or more, on a pretax basis) of the funds necessary to pay for the financing of stock purchases by individuals is bonused or distributed to them. In other words, agencies are largely allowing buyers to pay for most of their stock using bonuses/distributions they qualify for once they're owners.

? The No. 1 challenge faced by agencies in perpetuating internally remains a lack of able buyers. Other issues include a lack of operational health for the agency, unreasonable seller expectations and the lack of a perpetuation plan, but, by a significant margin, a lack of buyers is perceived anyway to be the biggest issue to overcome in perpetuating internally.

How can agencies recruit and mentor young talent?

Doran: I think it's a good idea to have a sense as to what level of investment in young producer talent is healthy. Reagan developed a metric a few years back called NUPP (net unvalidated producer payroll), which is simply the amount of payroll (not benefits, just payroll) devoted to unvalidated producer compensation. By unvalidated payroll, we mean what developing producers were paid versus what they would have earned as a straight commission producer.

For example, let's assume you have a young producer who you paid $50,000 in payroll over the course of the year. The producer has a $75,000 commission book of business and your agency pays a 30 percent commission rate. Therefore, the producer “earned” $22,500 of the compensation you paid him ($75,000*30 percent), so $27,500 of his compensation was unvalidated payroll. Add up all the unvalidated compensation and express it is a percentage of revenue to arrive at NUPP.

We find less that a less than 1 percent NUPP investment to be an indication an agency is likely not investing enough in future growth resources. 1.0 to 1.5 percent is a “yellow light” — it's OK, but top-performing agencies generally operate with an ongoing NUPP north of 1.5 percent.

Once you have determined what you should be investing (and how many new producers to have “in development”), implement some strategies we learned from our 2009 Young Producer Study (available for free at www.reaganconsulting.com) regarding how to successfully recruit and develop young producers:

? Hiring college graduates is a winning strategy. Fifty-three percent of successful young producers included in the study were hired directly out of college; only 1.2 percent were hired from another agency. Why hire out of college? As one agency owner told us, “Because that's where the talent is!”

? For firms that do hire directly out of college, 59 percent recruited directly off campus or had internship programs.

? Of the successful young producers in the study who did not come directly from college, more than 75 percent came from outside the industry and most had no prior sales experience. So when looking outside the industry for young producers, look beyond sales. The financial services industry accounted for roughly 25 percent of the successful producers recruited from other industries.

? Mentoring is a must when developing young producers. Ninety-seven percent of the study's leading firms employ a structured as opposed to informal mentoring program.

? Training methodologies vary widely in the industry. A majority of firms, however, make liberal use of carrier schools and outside sales training with their young producers to supplement their internal training.

It's the best to hire young producers in “classes.” This approach helps in three ways: It diversifies the risk of an agency's unvalidated producers, allows for more efficiency in training and creates camaraderie and competition among the trainees.

Linnert: The biggest thing agents and brokers can do differently to recruit and mentor young talent is to change the pre-existing mindset regarding this issue. Recruiting and developing talent must be viewed as a proactive and relationship-based sale in the same manner as identifying, nurturing and closing a top prospect. While most agencies may state they are always looking for good talent, they rarely allocate the necessary time and resources to successfully execute. Just as the best accounts do not walk into an agency asking for a business partner, neither does the best talent walk through the agency's front door asking for a job. The best talent, like the best accounts, must be identified and sold by the agency.

Agencies will employ several full-time sales and service personnel to recruit, train and service a top account. Likewise, the best agencies hire and retain twice as many producers as their average agency counterparts. They do this by making recruiting and development a cultural priority, maintaining internal training programs, allocating one or more full-time equivalent employees to the process, establishing internal goals and metrics relative to weekly resumes reviewed/candidates called/interviews set up, incorporating investment dollars into the annual budget and assigning each new producer to hire a senior level closer.

Many agents state they have neither the time nor the money to embark upon building such a regimented process. They do. It is just a matter of where they choose to invest these resources. High-growth agents have done the math, quantified the returns and proven that the investment returns on a well-structured producer hiring and training process is double to triple that of an agency acquisition.

Hicks: Agency leaders tell me it can be hard to get college recruits to work in this industry. That's because so many agencies don't look like places where young people want to be. This is fixable. Agencies can create a culture that's attractive to young talent–a culture that engages everyone in the direction of the agency, celebrates and rewards its people, fully leverages technology, maintains a contemporary work environment and embraces a point of view. Such a culture helps retain young talent, too. As for mentoring, the key is to have a mentoring plan that people actually follow. One agency we have gotten to know has had tremendous success by formalizing its mentoring program rather than making it a happenstance activity, and by creating a compensation connection for the mentors. In such a scenario, everyone comes out ahead.

How can agents best leverage their existing technology to automate more agency processes?

Hicks: Because we help agency CEOs achieve what they want to achieve in the big-picture sense rather than provide specific IT solutions, we are not experts in how best to leverage technology for automation. I will say, however, that some agencies we work with are directing their technology investment to improve the direct experience of the customer, in addition to enhancing back-office systems. By putting more control in the hands of the customer, and paying close attention to that “user experience,” the agency takes a step toward further differentiating itself.

What would you say is the biggest challenge agents face, and what can they do to overcome it?

Hicks: I'll address the biggest challenge from the standpoint of the CEO, because that's who we work with, and it's this: learning how to lead effectively. Many agency CEOs got there because they had breathtaking success as producers. They have tremendous “people” skills. But as leaders, they face a whole new set of challenges, and they need to develop a new set of skills that include relational skills and the ability to influence followers. Some can't understand why the producers in the agency don't consistently perform at high levels, as the leader did when he or she was producing. And these CEOs often struggle with creating alignment among their leadership teams. They feel the “system,” for whatever reason, is resisting them, and they don't know why. To overcome this challenge, we work with CEOs to clarify their vision, create alignment around that vision and, perhaps most importantly, get the enterprise to execute to plan and get results.

Linnert: By far the biggest challenge is leadership. Too often, agency executives bypass leadership and decision making in exchange for consensus. Most executives fear cultural disruption, manage by committee and subsequently fail to execute necessary and evolving change strategies. Conversely, leaders exhibit the belief, focus and perseverance needed to build and run viable operations. True leaders believe cultural evolutions are always happening and thus embrace change. They think positively and proactively about the benefits of change versus making consistent excuses as to why new ideas do not pertain to their specific operation. Leaders also consistently communicate to the entire agency that change is good.

Leaders have to focus to rebalance and reallocate where time is being invested so the most productive initiatives are being accomplished. They surround themselves with people who share common beliefs and values and filter out the position. Finally, leaders have the perseverance to execute. Most strategies fail because there is no long term commitment to execution. We see it with business plans, perpetuation strategies, new technologies, etc. Leaders recognize that leadership is not granted or assumed by title or position. Rather, leadership is measured by the individuals who follow, and individuals can only follow an executive who is moving somewhere.

Doran: I don't think most agencies are trying to respond strategically to many of the short-term issues they face (the economy, P&C market pricing, etc.), as there are limits to one's ability to overcome these temporal issues. As I said earlier, many agencies are simply riding out the storm rather than changing their businesses fundamentally to respond to a tough economy. Even most agencies' response to healthcare reform is somewhat modest to date, as the playing field remains largely undefined for most agencies. It is very hard to plan strategically until you know the actual lay of the land, which remains very uncertain with regard health insurance.

The biggest differentiator between winners and losers in the industry, regardless of the time and regardless of whatever macro issues the country's facing, remains the quality of an agency's sales culture. In this economy, those agencies that can write significant new business are doing just fine. Those who cannot are really struggling. As always, a vibrant sales culture is best characterized by:

? Better than average individual new business by producer results

? A high degree of accountability for sales results

? A commitment to the ongoing investment in and development of young producers

? A heavy investment on developing value-added services (claims management, loss control, wellness, etc.) for the benefit clients

? A focus on specialty practice groups and specialty niches.