Broker Growth Strategizing: Avoiding the Reactivity Trap

Think why most brokers got in this business in the first place. Yes, they wanted to make money. But they also wanted to call their own shots, enjoy the growth of their business and cultivate client relationships.

And, despite the dire predictions of direct insurance and the scare of “distintermediation” of the business, there are still many prosperous brokers out there. This is especially true in the current environment of stiff premium hikes and subsequently higher commissions. These brokers are gaining customers, enjoying a certain level of success and earning a respectable earning for themselves, their producers and employees. But they have hit a plateau – and many know it.

Principals have to lift their heads from the day-to-day struggles of the brokerage’s operations and clearly assess the situation. They have to take stock of their brokerage and determine which of the four modes of growth it is in:

Negative;

Flat;

Horizontal; or

Vertical.

Some of these growth models may be hard to discern in a hard market, in which brokers may be increasing revenues, but losing customers. In a “negative growth” situation, this is exactly the case. A “flat growth” model means that the brokerage is simply “churning” clients.

In “horizontal growth”, customer count and revenue are both up, but so are expenses. The vast majority of today’s brokerages are in horizontal growth mode. This is the plateau. Yes, revenues are increasing, but servicing and expense costs are taking up most of that increase. The issue is profitability – and productivity.

REACTIVITY TRAP

Here is what a horizontal growth brokerage looks like. The broker principals are stuck in a rut. Work seems like a chore. Day-to-day issues of information technology systems, staffing and customer service, consume most of the principal’s energy. Despite considerable allocation of effort and resources, these “problems” do not get fixed. The brokerage is running to stand still in dealing with service issues. There is a resignation on the part of principals to the status quo, coupled with a lingering fear that the brokerage’s independence is in jeopardy. They wonder how they got into this situation in the first place. We think it is because they’ve fallen into a “reactivity trap” – reacting to the customer, reacting to the companies, reacting to their staff.

The problem with getting out of a reactivity trap is that the old solutions will not work. Many principals think the answer is to hire more producers. But, they simply get more horizontal growth. Salespeople are often so tied down with customer service issues, they are too busy to go after new clients. Some principals think they should focus more on products or price. They become “commodity-oriented”, and offer few ways to specialize or differentiate their services. Others think the answer is to micro-manage every aspect of operations. They get buried in paper or technology, becoming more frazzled by the day. If this sounds familiar, there is a way to escape this trap. We call it the “ten great plays of forcing vertical growth.”

VERTICAL GROWTH

Take a look at where your brokerage stands now, in terms of performance. Here are four simple benchmarks that provide an initial snapshot of how a brokerage measures up:

EBITDA (earnings before interest, taxes, depreciation and amortization);

Net growth;

Revenue per employee; and

Closing ratio.

Many brokers have likely heard or used these terms before, particularly the all-important “EBITDA”, which is fairly self-explanatory. But we should define how the others are used here. Net growth is measured by the client count, policy count and commission income of this year divided by last year. This differentiates growth versus net growth.

Revenue per employee is defined as total revenue divided by total equivalent full-time employees. And the closing ratio is measured here by the number of sales made divided by the number of client “presentations.” A presentation is a full explanation and offering of your brokerage’s services to a client who has expressed interest.

With these definitions in mind, take this simple test of your brokerage’s performance.

An honest appraisal of where a brokerage stands in these key areas will help provide context and determine the next moves in creating a model of vertical growth (there are ten other measurements we use as “critical performance indicators”).

TEN GREAT PLAYS

The first step in “the ten great plays of forcing vertical growth” is to segment your customer base. Principals have to take a much closer look at who their clients are, what they produce for the brokerage and how they are classified. Sadly, in most cases, modern brokers have very little information on the vastly different contributions various customers make to their bottom line.

Many brokers have likely heard of Pareto’s Principle, or the 80/20 rule. In general, the top 20% of your clients generate 80% of revenue. However, it does go a bit deeper than that in terms of segmentation. If you look at the top 20% of clients, there is a further breakdown between “A clients” (typically about 5%), and “B clients” (15%). These “A clients” usually provide 50% of a brokerage’s revenue, while the “B clients” contribute about 30%. And within that vast “C client” segment of 80%, there is a subset of “Y accounts” – as in, “why do we have these clients at all?” These accounts are service intensive, price sensitive and low premium.

Or if you look at it another way, determine what is 10% of the total revenue in your book of business (expressed in dollars). Starting at the top of your customer list, how many customers does it take to make up this amount of revenue (expressed in number of customers). The same can be done for the bottom of your customer list – being your 80/20 split.

The reality today is that most brokers try to service every client at exactly the same level, akin to nailing jelly to the wall. It is an unachievable goal. What happens instead is that the top 20% wind up subsidizing the bottom 80% of clients. If brokers are going to over-service anyone, it had better be the top 20%.

COST EFFICIENCY

The “C clients” typically cost a brokerage more in service time than they contribute in premium. The broker’s goal should be to offer them a satisfactory level of service by “trading them down” to a service center – another step in the vertical growth process.

And what about “Y customers”? They should be fired from the brokerage – yes, fired. A brokerage serious about its profitability should send a letter out upon renewal, informing clients that it would be in their best interests to seek another broker to handle their insurance program and that files have been marked to lapse all policies on renewal. The Registered Insurance Brokers of Ontario (RIBO) now has a policy, outlined in its spring, 2002 newsletter, on how to properly “resign” as a broker from a single client.

Customer segmentation is just the first of “the ten great plays of forcing vertical growth”. There are many more strategies for the ambitious broker to pursue – “service hand-off”, “customer trade-down”, “minimum account size”, “value added services”, “proactive client relationship management” to name a few.

For many brokers, these are just words. But for those who are tired of being stuck in the trap, they represent a way out. What may seem like an unreachable goal of 35% EBITDA or a closing ratio of 90% can, and has, become a reality for dozens of brokerages.