If you expected market conditions and other external factors to have negatively affected this year's performance results in the 15th annual "Best Practices Study," think again. Unexpectedly, organic revenue growth rates were up in all revenue categories, profitability remained high, and productivity continued to climb.
In the early part of this decade, when a hard market made double-digit revenue growth rates easy to achieve, Best Practices agencies were attaining phenomenal results. Higher profit margins and productivity levels were expected.
The 2007 study results, however–released this month by the Alexandria, Va.-based Independent Insurance Agents and Brokers of America and Reagan Consulting in Atlanta–were achieved in a very different environment.
Many of the same external factors adversely affecting agency performance when the survey was launched in 1993 were at work during the last fiscal year.
Despite soft market conditions, a dearth of new talent, increased competition and a host of other negative forces, the 2007 Best Practices agencies proved they could still achieve good results even in tough times.
When asked what they attributed their success to, no other factor was named more frequently and ranked near the top of the list more consistently, regardless of agency size, than "the quality of our people."
Quality was repeatedly defined as a strong work ethic, extensive knowledge/expertise, integrity and dedication. This quality, coupled with technology utilization, allowed Best Practices agencies to push productivity levels higher than ever.
Between 1993–when the average $3.5 million revenue agency had 42.5 employees, with average revenues-per-employee of $80,793–and 2007, tremendous gains have been made. Today, that same revenue-sized agency has only 25.4 employees with average revenues per employee of $160,979.
Considering market conditions, noteworthy increases were realized in just the last three years.
Since 2004–the last time Best Practices agencies were selected for the study–head counts have dropped in all but the largest revenue category, and the revenue per employee has increased in all categories.
The increase in the number of employees for the group of agencies with more than $25 million in revenue is consistent with the IIABA's latest "Agency Universe Study."
It pointed to two trends–the number of small agencies is shrinking while the number of larger firms is increasing, and the larger agencies are getting bigger–hence greater head counts.
Overall, the 2007 Best Practices agencies are doing much more with fewer but exceptional people. This reality continued to drive operating costs down in the form of lower occupancy expenses, equipment needs, etc. As a result, pro forma profit margins remained stable or continued to improve over prior years.
Strong net revenue growth also contributed to good profit margins. The organic growth rates were the big surprise in this year's study.
Generally speaking, the numbers were stronger than expected. Driving the higher numbers were firms in the Southeast, Southwest and coastal areas around the country that benefited from population growth–and, in many cases, higher pricing on accounts with coastal exposures. There was, for example, a significant disparity in results for agencies in the Midwest versus firms in Florida, Texas and California.
Nevertheless, a regional analysis comparing agencies with net revenues both over and under $5 million shows that double-digit organic net revenue growth was achieved in most regions.
Interestingly, a large number of the 2007 Best Practices agencies, regardless of size, articulated the need to focus on revenue growth and foster a sales culture as a critical success factor.
The majority had implemented programs for total account development, developed niches or created programs that expanded their geographic marketplace. Although most acknowledged the challenge, many of the agencies had also invested in new production talent. The strong growth rates suggest their strategies paid off.
The need to invest in growth strategies while maintaining adequate profitability has always been a challenge, but the 2007 Best Practices agencies appear to be striking the appropriate balance, as evidenced by a new statistic that was added to this year's study–the "Rule of 20″ score. This provides a quick means of calculating whether or not an agency is creating value for shareholders.
The score is the sum of an agency's EBITDA margin times 50 percent, plus the organic revenue growth rate. The secret to the Rule of 20 is the weighting of the relative importance of organic growth versus EBITDA (Earnings Before Interest Taxes Depreciation & Amortization).
Generally speaking, an outcome of 20 means an agency is generating a shareholder return that is acceptable for a well-run agency. A score of less than 20 indicates room for improvement, while a score above 20 is outstanding.
As it turns out, the Best Practices agencies in all categories except for those with over $25 million in revenue (which came in at 18.7) scored better than 20 under this measurement. Broken down by revenue, the results were as follows:
o Less than $1.25 million in revenue–22.8.
o $1.25-to-2.5 million–24.3
o $2.5-to-5 million–29.8
o $5-to-10 million–22.5
o $10-to-25 million–26.9
o Over $25 million–18.7
The original goal of the IIABA's Best Practices initiative was to help agency owners enhance the value of their agencies. The Best Practices agencies appear to have mastered the task.
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