Operational Excellence As Competitive Advantage

Let's talk about what's keeping you up at night.

Property Casualty 360, June 22, 2012, "GEICO Ad Spending Far Outstrips Its Peers"

A lizard, a caveman and now a possum. GEICO spent far more on auto insurance advertising in 2011 than their competition, both on an absolute basis and as a percentage of the business the company wrote. This, according to a new study released last week and reported by Reuters. With aggressive pricing and heavy advertising, GEICO has quadrupled its market share of the U.S. auto insurance market share over the last 20 years. GEICO's advertising budget represented 6.5 percent of premiums written in 2011.

Anyone who watches  even a little television is familiar with the GEICO brand. And Allstate. And State Farm. You can't compete against these giants by increasing your ad budget. You can't consistently compete against them using price as the competitive advantage. So how do you compete?

Many independent agents say it is their superior customer service that sets them apart. Competing on the basis of service in a 24/7, on-demand, marketplace requires a level of operational excellence that embodies efficiency and effectiveness, employee engagement and customer and customer focus, profitability and business value.  Read more about operational excellence as a competitive advantage here. 

From Theory to Practice

Can you say with confidence that the way you do business gives you a competitive advantage?

If the answer is, "YES!" 

Sustain it. Stuff happens. Take a proactive approach to sustained excellence. Continuously measure, test, improve, measure.

Proclaim it. Make sure everyone in your organization understands the value you bring to current and prospective clients. It's part of your culture. Make it part of your ongoing communications. 

If you're not sure, the the answer is probably, "No.

Find the gaps. Make the investment in time and resources to understand what works and what doesn't.

• Ask your employees. Use surveys, focus groups and one-on-ones to tap into the talent you already have.
• Ask your customers. Get employee feedback on customers, use focus groups, and individual and group surveys to understand what customers want and how well you deliver.
• Review your operations. Start with a checklist or ask for help. If you don't feel you can be objective enough or thorough enough, hire a consultant.
• Measure your results. Focus on business value rather as well as productivity and profitability. Compare to industry averages but only as a way to create your own benchmarks.

Fill the gaps. Use what you learn to build a strategic plan to get to operational excellence. You can't do everything at once and you shouldn't try. Set priorities. Itentify accountabilities - who is going to do what by when and how will you measure results. Involve the entire organization and communicate constantly. 

Think of it as a process. You'll never really be done so be prepared to sustain it and proclaim it as you go.

Do your excellent operations give you a competitive advantage? Are your employees engaged in keeping your customers delighted and bringing more in the door? Can your team deliver on time every time, even when things don't go just right? If you're not satisfied with the answers to these questions, call or email pam@transformationadvisors.com..

Contingent Income Rising

Let's talk about what's keeping you up at night.

"Agency Compensation Expected to Rise in 2012: Ward Group"

Well, that's good news. No sleeplessness on account of that. Right? Right!

Unless, of course, you're counting on your contingent income to cover operating costs. It's been a couple of tough years and many agencies are reporting low or no growth. Without those profit sharing checks, profits would be down significantly instead of just a little. And there is a reason it's called "contingent" income. It depends on several factors -- some of which you control and some you don't. Catastrophic losses are not predictable. Premium volume and growth you can predict. And while you can't know exactly how your growth and volume will convert to contingent income, you can predict operating revenue and expense. Making sure the former covers the latter is critical when there are so many negative factors driving the economic forecast. It's enough to keep you restless if not outright sleepless.

In the study referenced above, reported in the Insurance Journal on line, there are also some potential trade-offs to go along with what are expected to be increases in agency compensation. Requirements for premium volume and growth are likely to increase for some of the companies in the study, as are loss caps. So, both the controllable and the uncontrollable may be more challenging to manage.  All the more reason to make sure your contingent income is only used for contingent outgo.

Forecasting and budgeting for the independent agent has become for challenging than ever. If you're not already doing contingent projections, you may want to start. It's a good way to look at your finances, regardless of the economy. Start with a baseline budget and project no change in income or expense. That probably means cutting back on some things just to stay even. Then create a second budget for growth, projecting realistic revenue increases based on realistic but aggressive sales projections. And, last, create a third budget projecting worst-case revenue projections and a worst-case expense budget. You can then look at what you will have to do to make each budget a reality and set your plans accordingly.

While we're on the subject of projections and budgets,  if you're having trouble making ends meet, be sure you distinguish between revenue problems and expense problems. Whether your income projections are positive or negative, if you haven't already addressed your expense problems, the time to do it is now.

How many ways are there to measure profitability? At least four. Check out our Models of Profitability.  And if you would like some objective third party help with projections and budgets, call or email and let's have a conversation.

And if the expected rise in agency compensation predicted for 2012 is great news for you, is there something else keeping you up at night?

Retention & New Sales

Let's talk about what's keeping you up at night.

We need more new sales. Retention has been better than expected, so we stayed almost flat, revenue-wise, but new sales are harder than ever to make. No one wants to change and there are no new accounts. How do we get back on a positive growth path?

Start by asking yourself a few questions. The answers can tell you what you're doing right and what you could do better.

• Why did your toughest account renew their account?
• Why did you lose that great account?
• Why did your newest account move their insurance to your agency?

If you can answer these questions, thoroughly and analytically, then you know what your competitive advantage is. And that's the key to sales success - leveraging those things that you do better than the competition. If you can't answer those questions, then your sales team - in fact your entire business - is at a disadvantage. 

Business and personal insurance buyers have a lot of choices. And there is always someone who is willing to provide a lower price. When you can demonstrate that the lower price comes with a cost and you can provide added value in terms of something important to the customer, you have something to sell.

For growth and profitability, it's all about competitive advantage. Make sure every member of your team is able to talk convincingly about why customers buy from you and stay with you.

If you don't know what sets you apart from your competition - if you can't answer those critical questions - let's have a conversation. 

Planning for Improvement

If you and your team are hunkered down waiting for the market or the economy to turn around, you may have a long wait. Now is the time to look for opportunities. You can have your best year ever! 

Focus! Focus! Focus!  Plans often fail because too many issues are addressed at one time, not because there is anything inherently wrong with them. How does the coyote eat the buffalo? One bite at a time! There is always a lot to do. So to ensure that you and your team stay focused, identify those things that are imperative to fulfilling the vision of your business. Ask, “What conditions must exist for us to be who and where we want to be?” Think in terms of necessary and sufficient. Concentrate your efforts on the most important issues or Critical Success Factors. Tackling your goals one at a time, you will find your business plans much easier to achieve. 

For most businesses, Critical Success Factors center around people and product. What about your organization – your staff – is critical to your success? What must they be able to do well to ensure your competitive advantage? What about your customers is critical to your success? What are their expectations and how can you exceed them? What about your product/service is critical to your success?  If insurance is just another commodity, what sets you apart? A clear understanding of what is most important makes it possible to set realistic, achievable, smarter goals.

Success breeds success. Improvement generates more improvement. With every achieved goal, your (and your team’s) confidence grows. These incremental successes will inspire and encourage you and your team. You have the knowledge, experience, drive and enthusiasm to achieve your vision. You can have your best year ever!

Critical Success Factors

Want to drive success in your business? Focus your energy and your resources on those things that are the most important. Sure, you'll have to deal with a lot of urgent activities that don't contribute significantly to the achievement of your goals. Don't let the urgent get in the way of the important, however. If you're only working in your business, and never on your business, you are far less likely to take your business to the next level.

Choose Your Customer

Competitive advantage requires that you know who your customer is. And who your customer is not.

Business owners are often afraid that choosing who their customers are and are not will limit their profitability. The fear is that, if you narrow your customer demographic, you’ll miss out on a lot of business. The opposite is true, though. When you don’t target a specific demographic, your staff wastes a lot of time and money going after business that will not be profitable and, probably, won’t stick. In fact, choosing who your customers are and are not will free your staff to respond to your most profitable customers and get more customers like them.

Choosing who your customers are and are not doesn’t confine or lock you into a strategy. Rather, it keeps you steady, focused and able to respond -- rather than react -- in an ever-changing environment.

Finding & Keeping Great Employees

Do your view your employees as your biggest asset or your biggest expense?

"All that separates you from your competition are the skills, knowledge, commitment, and abilities of the people who work for you. Companies that manage people right will outperform companies that don’t by 30 to 40 percent."

-- Jeffrey Pfeffer
Author of The Human Equation:
Building Profits by Putting People First

As an insurance agency, the focus of your business is on developing new customers and retaining the customers you have. You need new business and retention to grow, and growth is key to profitability.

However, if you spend all your time and energy on sales and service, you may be overlooking one of the critical success factors for growth and profitability.
When asked what their biggest challenges are today, agency owners invariably place “finding and keeping quality staff” high on the list. It’s true for large and small, urban and rural agencies alike. So perhaps a good portion of your time and energy should focus on developing new employees and retaining the employees you have.

The workplace has changed and continues to change. With a keen focus on profitability, employers want more for their employment dollar. And those employees who are willing to give more also expect more in return.

One thing that has not changed is that the insurance industry continues to have a poor image as a place to work. As a group, insurance agencies hire fewer college graduates, pay lower wages, and invest less in training and developing staff.
If you’re not thinking differently about the relationship between your employees and your bottom line, it’s time to start. Do your view your employees as your biggest asset or your biggest expense?

Workflow That Works

When things go wrong, it's easy to assume that some person or people have made a mistake or didn't follow procedure. Often, though, it's not about the people. It's about the process.

When you find errors or mistakes recurring, the first question you should ask is "Why?" How effective are the existing processes and systems? Is everyone following the same process consistently? Or, are there obstacles to do the job right?

Even if it appears that people are causing problems, understanding the root cause is important. You can't fix people. You can't even change people. You can provide better tools or training. You can improve a process.

Read more about fixing process, not people in the latest newsletter. B.I.G. Strategies for Business Excellence - Build Consistency.

The Bottom Line Contribution of Satisfied Employees

Do you know what's most important to your employees when it comes to job satisfaction? Here's a quick, fun, way to find out.

Why does it matter to you whether or not your employees are 'satisfied?' You just want them to do their jobs. You don't care if they like it or not. Right? Well, you should care. It matters to your bottom line.

Your employees -- producers, customer service representatives, marketing staff, assistants and clerks, accounting staff, and your receptionist --all contribute to the bottom line in very tangible ways. They help you find new customers and keep the ones you have. Knowledgeable, personable and satisfied employees are a very real asset. When you fail to nurture and protect this asset, the cost is high . . . perhaps higher than you realize. 

If employees aren’t given the right tools to do their jobs effectively, for example, or if they’re treated unfairly or are overworked and stressed out, they can become frustrated and unhappy. This has a negative impact on their productivity. 

More importantly, disgruntled employees can be disruptive to the entire organization, sharing their discontent with whomever will listen. Their attitude rubs off on others and brings the morale of the entire organization down. 

Low morale also takes its toll as your staff attempts to provide customer service. You can hear it in their voices. It shows in their attitude. A demoralized staff does not focus on looking for ways to delight your customer. Nor do they attempt to cross-sell accounts or upgrade coverages. 

There’s also a compounding effect. Studies have shown that increasing client retention by just 5 percent can boost an agency’s profitability by 50 to 100 percent or more. But the reverse is also true. Dissatisfied employees can cause retention to drop significantly. Lower retention equates to dramatically lower profits.

Last, but not least, when morale drops, turnover goes up, causing costs to go up dramatically as well.

And by the way... Take the quick management survey and see the number one satisfaction criteria for employees. That's the point of the last blog post. If you missed it, go here.

Producer Compensation - 3 Keys

Having a conversation, that almost turned into an argument, with a producer about compensation. He was adamant that all it took was to pay a high percent of commission. "Any good producer is going to be motivated by money - and nothing else matters." Well, he should know, shouldn't he? He's a good producer. But it's been a tough year and he didn't get a raise - meaning his commissions were flat. He didn't feel he had worked any less but he lost a couple of large accounts and all his new business production just went to fill the void left by lost business and lower exposure bases. I think his situation is not all that unusual.

This producer wants a bigger piece of the pie - he wants the agency to increase the percentage of commission paid on new business. "It would be a good investment," he says. The agency owner, on the other hand, is looking at expenses and flat production and thinking he needs to lower the new commission rate, pay a level commission to encourage net new growth and only pay higher commissions when the book grows. He is convinced that the agency can't afford the current plan, let alone a richer one.

I'm going to help them update their producer compensation plan and try to help each meet his goals. Because I think that's what a good compensation package does. It balances the costs with the benefits (revenues) and the agency's goals with the producer's goals. In fact, I think there are three requirements for an effective sales compensation plan.

1. Affordability. If you pay too much, the financial health of the business is vulnerable. That doesn't help anyone.
2. Competitiveness. If you don't pay enough, you can't attract the best people and keep them satisfied.
3. Alignment. Producers should be incentivized to producer business that is aligned to agency goals. And, compensation plans should be flexible enough to ensure that producers can meet their personal goals as well.

If the compensation plan meets those three requirements, it should be a winning proposition all around. That won't cause the market to harden or the economy to improve. But it could improve the situation in this agency. Maybe others as well.

I recently recorded two webinars for "The Inside Track" on the IMMS website. Watch the Webinar here.

Celebrate and Share Success with Employees

We’re at the beginning of March already. Is 2010 shaping up to be a lot like 2009 for you – and is that a good thing or a bad thing? If things are looking up – or if you have been able to thrive in spite of all the bad news – be sure you and your staff celebrate your success. Even the small ones count. Tell your staff what’s gone well and what you plan for the New Year to make it even better.
Sharing success is part of sharing the vision for your business with those who will help make it happen. It’s all part of the 7 BIG Strategies for managing your business from a strategic perspective. These seven strategies can mean the difference between whether you survive the run-off from the economic upheaval or thrive and grow in the new decade.

Read more about the 7 BIG Strategies here…

Measures of Success

Is your business successful? How do you measure success? In this economy - in this market - how do you feel about your business results? Are you "satisfied?"

We hear:

"Revenues are down.
"Rate continues to be low."

"I'm losing accounts because they are going out of business."

"Revenue per account is down."

So does that mean your business is "in trouble?" Last year you had a successful insurance agency. How did you measure success? By that measure, are you still successful? If you answer, "No," then why? What has changed? Maybe nothing has changed. And maybe that's the problem.

There is no question that some businesses will fail - are failing - in the current environment. Many of those business owners would have said to me less than a year ago, "If it ain't broke, don't fix it." Well, there's "broke." And then there's blase. Business as usual is a business killer if the only measure of success is this year's profit.

That said, what do we do about it? Start by looking at how you measure success. Operating profit, how well operating revenue (without contingent income) covers operating expense is a critical indicator - much more reliable than pre-tax profit. Also take a look at the percentage of fixed vs. variable expense. During periods when income is down, do expenses stay high? If so, it becomes even more important to maintain tight expense control even when times are good.

Two other solid indicators of performance are 'hit ratio' and account retention.

Hit ratio measures sales effectiveness - the number of sales made to the total number of sales opportunities. And when you look at this one, be sure to compare your total opportunities to prior years. If you're not going after as many new accounts, you may see a false positive here, i.e., hits will be measured against a smaller base.

Account retention tells you how many customers you retain. It's a little more difficult to measure than revenue persistency, which is what we usually refer to as "retention," but is a better measure of service effectiveness. If revenue per account is down, it's more important than ever to keep the customers you have.

Everyone is feeling the effects of economic downturn. And the lingering soft market. Businesses that are not "in trouble" are the ones that measure their success consistently and critically - regardless of the economy or the market cycle.

The Revenue Paradox

If you haven't seen the Insurance Journal article Bad Economy Not Impacting Essential Insurance Coverages it's worth looking at if only as a bit of encouraging news amid all the bad.

The results of this survey shouldn't be surprising - and I'll bet a similar survey of businesses would produce similar results. It highlights what I call the "Revenue Paradox." You must be willing to reduce revenue to retain accounts. And, in fact, you must expend resources to reduce revenue to retain accounts. Ouch!

Managing expenses is more important than ever. There just isn't any room for waste. We're working on tools to help with expense review and reduction as well as a rolling cash flow tool to highlight critical issues before they get to be disastrous.

The good news continues to be, if you manage your business well in tough times, as things get better, you have a distinct advantage over companies that think business as usual is good enough.

Differentiation

"When you fail to differentiate yourself from another service firm, the competition is reduced to choosing between commodities. But, law firms, accounting firms, management consulting firms, financial service firms, insurance firms, and the like are certainly not commodities – unless those in the industry commoditize themselves by failing to differentiate their offering from that of another."

The author went on to say that any buyer, faced with competing firms that all seemed "near clone-like," will either stay with what they have or make their decision based on the best price.

The above quote and reference is from a long blog dealing with the process of responding to RFPs in writing. You can read the entire article here. The message is applicable whether the "proposal" is in response to an RFP, in writing, or verbal. And the point is clear - your ability to differentiate yourself from other insurance agencies and, perhaps more importantly, from Internet carrier and consolidator sites, is what will enable you to survive and thrive in this economy or any other.

It's NOT all about the economy

Even in this difficult economic environment, is price the driving criteria for any purchase? When you've lost an account, it's easy to assume so - especially in the absence of a more definitive reason. When clients tell me it's all about the economy, I'm more than a little skeptical. Our own unscientific research shows that, whether it's insurance or groceries, price is almost never the only reason why anyone selects one product or service over another.

And now there' s research that supports my theory - and the "buyers" in this case are insurance agents. "When it comes to an agency's satisfaction with its personal lines insurance companies, commissions do not rank as tops. Nor do commissions rank second. In fact, out of six satisfaction factors, compensation from an insurer ranks dead last, according to a new industry study. "

You can read the article on the Insurance Journal website but it's not surprising. You select your carriers based on a whole package of customer needs and preferences, knowing that it's value, not price, that will influence their purchasing decision.

A good thing to remember if you're losing business and wondering why.