Operational Efficiency Should Be Priority No. 3 for Agency Managers

Managing an independent insurance agency in the current hard economy and soft market requires agents to set priorities. In the Jan. 28, 2009, issue of Insurance Journal, Juan Andrade, executive vice-president for sales and distribution at The Hartford, identified customer retention as agency priority No. 1. Next, in the Feb. 9, 2009, issue he described priority No. 2 as maintaining a disciplined and systematic approach to sales. Of course, there is more to successful management in difficult times than managing and growing revenues. It’s also a time to take a hard look at costs. Operational efficiency is priority No. 3. Andrade said that while agents right now are wise to take a holistic approach to management, the expense picture has to be brought into clear focus. In this final installment of an interview with Insurance Journal’s Andrew Simpson, Andrade explained where agencies might look for operational efficiencies.

Of course, there is more to successful management in difficult times than managing and growing revenues. It’s also a time to take a hard look at costs. Operational efficiency is priority No. 3. Andrade said that while agents right now are wise to take a holistic approach to management, the expense picture has to be brought into clear focus.

Insurance Journal‘s Andrew Simpson asked Andrade where agencies might look for operational efficiencies during a time like this.
Andrade: Looking at it from an expense perspective, this really is an opportunity to look at your margins, particularly with a top line that may be declining or may be flat. This is the time when you may want to defer certain types of activities. … Travel … may be one.

You may look at, maybe, self-funding your own investments that you are making within your agency as opposed to adding incremental cost to the agency at this point in time.

It’s always important to realize that 55 percent to 60 percent of all the cost within any given agency is going to be personnel cost. The key here is making sure that your people, your employees are being as productive as they can, particularly given the market situation right now. So, that’s back to the focus on sales, which is really making sure that they are taking every single minute that they can to be as sales-oriented as possible.

It’s a great time to be looking at your processes within the agency, streamlining things that you do, and frankly being very introspective in asking yourself questions about should [you] continue to do these types of things and making your own business plan and decisions based on that.

Insurance Journal: Are hiring freezes or salary freezes a good idea?
Andrade: It really depends on where you are from an agency perspective. If you are at a place where your top line may be shrinking and you’re seeing costs continue to increase, you may ultimately be forced with having to make those decisions, because again it goes back to 60 percent of your cost will be people related.

But there are a number of things that you can do before you get there: changing the way you do things within the agency, changing processes, making sure that you’re more focused on the art of selling, on the science of selling, if you will, that you are bringing in leads, you are actively working the portfolio, managing your retention.

Those are all the things I would be looking at to increase productivity before I would be going down the line of layoff or an impact of that sort on the employees. It really all depends on an individual situation of where [you] are today.

Insurance Journal: How about renegotiating leases or supplier contracts from vendors?
Andrade: That’s actually another huge area of opportunity. Because I would think that second after personnel costs there really are going to be those fixed costs. It’s a great time to be negotiating with your vendors at this point in time.

I know certainly as a company we do that; leasing particularly your space, taking advantage of the housing market [and] the commercial real estate market and which way it’s gone. There’s got to be some better deals out there.

Ask yourself questions. Do you really need to be in a Class A space, or is it OK to be in a Class B space? Those are decisions the principal will have to make based on the image he wants to represent for his particular agency.

But [with] vendors, whether it’s office supplies, staples, etc., this is a great time to be looking at your costs with a great level of detail. If you haven’t done that, you ought to start right now in making sure that you have a lot of transparency as to where your money is going.

Insurance Journal: How does an agency know it’s operating efficiently? What metrics might it look at to feel good about how it is doing?
Andrade: There are a number of metrics that [you] can look at. Revenue per employee is one. Commissions per employee; new business commissions per producer; these are all productivity measures that [you] could look at and say, “Okay, am I really maximizing the use of my personnel? Are we really focusing them on the right thing?”

Those type of flow metrics, whether it’s new commission, new production, those are very important things to be looking at.

Insurance Journal: We talked about efficiencies and how that sometimes involves layoffs as well as changing relationships with vendors or suppliers. Do you have advice for communicating the process of these decisions to what, in some cases, affects long time employees or long-time suppliers?
Andrade: My approach has always been open and honest, and frankly that’s the best way to be with anyone who has to manage people in these times.

The most important thing is making sure people are well-grounded in the context that the business is operating in, making sure people understand the current economic situation, making sure that people understand that really the business margins that we are trying to operate with, that they understand what the company, the business, the agency is focused on doing at this particular time to make sure that we keep a viable enterprise within that agency.

But if it comes to making tough decisions, the open and honest philosophy is always the best, which is really letting people understand why the action has to take place. If it is because the agency is not meeting particular profit margins that need to be met, that the top line is not growing as fast as it needs to be, it is important to be very open and honest with people at that time.

Part of that is also sharing with folks what your strategy is and how you are planning to manage all of this, so laying it out. Have a business plan for 2009 that … says if I can reach these goals from a top line perspective, if I can reach these revenue goals from a commission standpoint, this is where I need to keep my expenses at. And in order to do that, we need to do the following things on the commission side, maybe working with our company partners. I need to do the following things to generate new business or keep business that I already have in the books, and these are the following things that we are doing with the bookkeeper, the accountant, etc., within the agency to make sure that we manage those costs.

Being able to lay all of that plainly to people so they understand [it] is very important. The other thing that enables you to do is it engages them in the plan. It engages them from the perspective that if they know what targets you need to hit, to stay viable, to continue to grow, people can be very motivated by that.

Insurance Journal: This is a time when insurance agents are monitoring their financial situation closely. What indicators should they look for and maintain?
Andrade: There are a number of things that they ought to be looking at. Their pro forma earnings before tax is going to be a critical measure that they ought to be looking at. They ought to be looking at their liquidity ratios: how much cash on hand do they have? They ought to be looking and assessing their debt: How leveraged is the agency at that point in time?

To me, it really does come down to liquidity type measures of cash on hand, ability to meet payrolls, etc., but also the amount of debt that [you] currently have within that particular agency: How leveraged are you.

It goes back to the question you asked on leasing for example. I mean a big part of it is the building: Do you own it? Do you pay a mortgage on it? All of that comes into play. And so those are very wise things for all of us, frankly, to be looking at these days.

Insurance Journal: You speak with agents across the country and I assume the suggestions you have now are the same ones that you might have even in a good economy. But are agents are listening more now?
Andrade: I think so. I think everyone is listening more these days. I think you are right. A lot of what we have been talking about, whether it is a focus on retention, a focus on sales, a focus on your operating efficiencies, well that just applies across the board, and that’s just a good way to run a business regardless.

But right now, boy, we have to be a lot more vigilant, because the stakes have been raised and it is dangerous out there from an economic perspective. So I do find that the people that I am talking to across the country — and I spend probably four days out of every week traveling, meeting with our agents — are basically listening and they are acting.

Web Resource:
This is the third installment in an Insurance Journal interview with The Hartford’s Juan Andrade. View the entire Insurance Journal video series, “Managing an Agency in a Troubled Economy,” at www.insurancejournal.tv.

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