How the Best Agencies Do It: 8 Key Elements to Create the Ultimate Agency

The following is from by Cheryl Koch's presentation at IBA West's Blue Ribbon Confernece earlier this month. Cheryl is President and CEO of Agency Management Resource Group and serves as Managing Director of IBA West Education/Insurance Skills Center. The Insider will feature the remaining elements in subsequent stories.

In our consulting practice, we have the privilege of working with some of the finest agencies in the country.  In examining what sets these agencies apart and allows them to achieve substantially better results than their competitors, we have discovered eight key business practices that we believe will enable any agency to create and sustain an extraordinary organization.

Element No. 1—Know Your Numbers

In the past, we seldom found agencies struggling with accounting or financial issues.  More and more, we are called upon to assist agencies with accounting problems ranging from bank reconciliation to management system setup to data “scrubs”.  What may be happening is a loss of financial acumen among agency owners, managers and accounting personnel.

In the best run agencies, senior management knows that there are four or five critical measurements to determine the financial health of the agency, and they constantly monitor these numbers.  The traditional measures, such as EBITDA[1] are certainly still relevant, but those “big picture” numbers don’t necessarily help the agency spot trouble areas before it’s too late.  We like to look at the following data:

Measures of Productivity—Revenue per Employee is simply total commission income (with or without fee income) divided by the total number of agency employees, including owners.  This is a measure of operational efficiency since it indicates the agency’s ability to grow revenue at a steeper rate than it adds to staff.  In this market, it is also essential to measure Revenue Retention, not just account retention.  Even if the agency is able to renew most of its accounts, rate decreases will cause the agency’s revenue to decline.  Preservation of revenue through cross-selling is more important than ever.  An ancillary measurement, therefore, is Number of Policies per Account.  For many years, independent agencies have struggled with account rounding.  The best agencies have managed to push that number above 3, which means they are maximizing their Revenue per Relationship, an important component of profitability.

Measures of Profitability—Since most agents aren’t skilled in cost accounting, it has always been difficult to estimate profitability at the account level.  This is an important thing to know to determine if there are accounts that are actually costing the agency more to handle than the gross revenue they generate.  We encourage agents to determine their “high net” and “low net” accounts.  To do that, you need to have a formula to determine the real cost of servicing the account.  We have a simple calculation that allows an agency to compute the “cost of time” in the agency[2], and then apply that cost to the amount of time required to handle the various transactions on each account.  If an account is not producing the agency’s targeted profit margin, it must be evaluated to determine if the revenue can be increased through cross-selling or the handling costs decreased to bring it in line.

The Insider will feature the remaining elements in subsequent stories.

[1] Earnings Before Interest Taxes Depreciation and Amortization

[2] Annual total labor cost (including benefits) divided by 100,000=average per minute cost of agency time.  This can be further divided by the total number of employees to determine average cost per person. 

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