If you are seeking to build the profitability of your agency or brokerage, you may already be missing your biggest opportunity for 2013. It isn’t an issue of sales or strategy or training, or renewals or taxes or systems. Rather, it comes of a long-held industry culture of looking outward for growth.

Most management teams underestimate the profits and growth that can come from within their own operations. For those who see the potential, there’s a competitive advantage and profit aplenty to harvest.

For many agency principals, increasing organic growth and profitability requires hiring more producers, deepening relationships with insurers and pumping up sales performance. Where organic growth is anemic, there’s always the option of acquiring a book of business or other agencies. Though these activities all have an important time and place, they are often pursued to the neglect of far less costly and far more efficient means of delivering profitable growth.

It may sound like a truism, but to increase profitable growth, you must write accounts profitably. But how many agencies measure this? How many know which accounts are profitable? How many have evaluated and measured the steps of their processes in order to calculate the cost of processing their accounts?

Don’t “Just Do It”

The answer, unfortunately, is very few. Like Nike’s tag line, “Just Do It,” we’ve all been just doing it—managing accounts with limited reflection—for years. “Just doing it” means neglecting standardization, process discipline, measurement, compliance and consistency. This has resulted in enormous inefficiencies that are often accepted as an inevitable part of the business. Where a problem is recognized, the simple solution appears to be to automate it away through new systems. But lacking a disciplined approach to understanding process flow, agencies run the risk of baking in bad old processes into good new systems. The result: the return on investment promised by the software vendor fails to be delivered.

This is a frequent experience for those upgrading to new agency management systems, particularly for smaller independent agencies. The fact is that system vendors have limited resources available for reviewing process architecture and guiding the client through process redesign that would optimize the new system.

“Just doing it” for so many years has resulted in enormous hidden costs within agencies and across the insurance industry. Put aside the E&O risks incurred each day that arise as a result of different people within the agency performing the same task differently, often in contravention of their agency’s own aging standard operating procedures. Looked at purely in terms of direct expense, there is a huge drag on productivity, employee contribution, profitability and growth in allowing unexamined processes to persist. We estimate that most agencies can raise profits by 10 percent, which for an organization with a 20 percent margin represents a 50 percent improvement opportunity through process improvement.

Getting in Shape

“Process” is often neglected because it is so ubiquitous that we take it for granted. Familiarity breeds contempt. If it is seen, it is as the output of things we do, subject to the needs of the client or the producer or hour. Worse, it may be viewed as a necessary evil, a painful, boring workout program that the out-of-shape, would-be athlete leaves to another day.

Bad process eats profits for breakfast every day. Good process drives competitive advantage and profitable growth. Why do we allow bad process to endure? Why do compare it to an athletic workout program? Because process requires an evaluation of where you are today. Self-reflection and measurement lays bare all the things that don’t work and challenges people out of their comfort zone to change. It implies a criticism that if it’s so bad now, someone must be to blame. And if one is to change, it requires commitment, discipline, endurance and discomfort. No wonder so few agencies are process masters. It’s no wonder that few agencies have margins in the mid to high 30s.

Agencies should not embark on process evaluation and improvement as a source of self-criticism or shame. Rather, it is to be celebrated and embraced with pride. The rewards are profound, recurring and later become part of an agency’s ongoing annuity and value multiple. This is not to say that change is easy; it never is. You take one day at a time, but if you know where you’re headed, why and how, and you commit, you can achieve great and unexpected changes.

Setting Growth Targets

Consider that to add $100,000 to the bottom line for an agency operating at a 20 percent profit margin and combined commission rate of 10 percent (factoring in workers’ compensation) requires adding $500,000 in incremental commissions and $5 million in premiums. What does it normally take to add $5 million in premium given current resources? Hiring new producers can take years to pay back this $100,000 in profit. Investments in technology that yield scale efficiencies can take even longer to pay back.

But finding $100,000 in reduced processing costs is relatively easy and almost mundane. Agencies can do this by streamlining workflows, standardizing ad hoc tasks, triaging accounts, eliminating errors and rework, templating letters and proposals, segmenting service levels by account size and profitability, and delegating routine activities from well-compensated experienced staff down to competent but lower-paid staff or to external processing partners.

Moreover, once you find those efficiencies, you can reinvest the time savings back into writing more accounts, improving client retention through enhanced service and differentiation, engaging in innovation and, yes, hiring new producers and investing in technology. In essence, process improvement is the treasure trove in your own backyard.

Do What Counts

Rather than “Just Do It,” I have an alternative phrase I use and share when discussing agency process and profitability. It is “Do What Counts.” This is a way of saying you should focus your people on what drives the greatest value to your clients, to what your clients care about and what differentiates you. This includes good coverages, stable carriers, efficient claims handling, proactive service and relevant, timely information like stewardship reports. Any activity not directly delivering these outputs to clients results in financial leakage and drains organizational energies. In other words, any activity converted from routine processing to active client management is accretive to the business.

“Do What Counts” starts from the premise that your people are valuable and valued, but they are under-delivering on their potential through no fault of their own. By streamlining their operations, organizations can free up capacity and resources already existing within their organization to manage more accounts and stimulate revenue growth.

Far too many agents and brokers underuse staff by failing to recognize their potential to create value, allowing them to spend countless hours juggling routine tasks. Many managers are surprised by the results produced by establishing processing standards, identifying inefficient functions and streamlining workflows. Redirecting tasks and freeing producers, underwriters and staff from menial processing functions would inevitably reduce costs and improve throughput, while increasing the amount of time available for quality underwriting and value-added services. These changes would simultaneously boost retention and create new business opportunities.

Turning it Around

Good process starts with understanding what creates value for the client. It then requires looking inward to align and optimize internal resources to address client needs. It can be compared to people individually, who may be sick without knowing it. Their cholesterol and blood pressure may be high and their stamina weak. Their arteries are building unseen blockages that affect their physical performance across the board. To feel better, you can turn to workout schedules, which may seem onerous but hold the promise of transforming the quality of our lives and the scale of our accomplishments. Many begin the new year with a resolution to do just this.

Similarly for insurance organizations, a New Year’s resolution that focuses on what’s inside, on the ways of improving the efficiency, stamina, strength and fitness of the organization, is the most promising strategy for driving profitability, growth and competitive advantage in the new year. All parts of the organization will communicate and collaborate more effectively with each other and with clients on the outside.

In his seminal book about baseball, “Moneyball,” Michael Lewis writes, “scoring runs is less an art than a process.” The author explored the subject of how Billy Beane, as general manager of the Oakland Athletics, was able to build a winning baseball team based on a scientific approach to managing the aggregate performance of the whole team. With the smallest budget in the league and no star players, the Athletics outperformed all expectations, set the American League record for most consecutive wins and changed the way the game is played. The same principles that Beane applied to the Athletics holds for insurance organizations.

An entire field of study, “sabermetrics,” has evolved in baseball to optimize process over art. If this is true of baseball, it is even more so for running an insurance agency, which depends on aligning producers, account executives, markets and claims managers to meet the needs and salve the fears of insureds.

So if your producers are spending too much time in the office and your service staff berate the busywork that keeps them from meeting expectations and being more productive, consider process improvement as an approach that can deliver quick, yet meaningful wins and empower your people to be the engines of growth for your organization.

Special Reports /

Profitability is an Inside Job

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