As we have discussed in several previous articles, the overall value of an agency is dependent on a number of facts and perceptions considered in various ways by sellers and buyers. This complex mix is sorted out during various stages of the deal process, and this eventually leads to a value conclusion for the transaction.
One of the most important components within this mix of value propositions is the agency's ability to sustain revenue growth. To some, this statement may seem to be an affirmation of the obvious. However, the fact is that many agency principals treat this value proposition in a superficial way, never truly understanding the underlying requirements that drive sustainable revenue growth.
What are these requirements? Essentially, there are five major components to the foundation for building sustainable revenue growth. But first, let's examine the key words.
"Revenue" means income from any source, not just commissions. "Sustainable" means that the revenue will be available year after year. "Growth" means that revenue is increasing year after year. Taken together, "sustainable revenue growth" means that the agency will be able to continuously increase combined revenues from year to year.
Now let's examine the requirements that must be met in order to achieve a continuous increase in revenue from year to year.
First, the marketplace itself must be expanding. Targeting a shrinking or flat marketplace means that, assuming price stability, the agency must continuously gain increased market share in order to grow revenue. All things being equal, gaining market share is relatively easy for the first agency in a particular market niche. It's not easy once a number of agencies begin competing for the same niche. One example of a marketplace that is expanding is the broad category covering technology companies.
The next requirement is that agencies must be able to deliver solutions. Too many agencies consider delivery of a product the same as delivery of a solution. It's not. Insurance is only part of an overall solution for managing risk. Those agencies that sustain revenue growth understand this. These agencies have designed solutions that offer opportunities for a broader spectrum of fee-based services for their clients. This broader spectrum of service delivery develops deeper relationships and helps make it possible for the agency and client to continue to work closely as business or personal requirements change. This close mutual involvement makes it more difficult for competition to penetrate the relationship. The agency continues to benefit as the client's needs change with the growth of the family or business.
Technology companies are a useful category to illustrate the importance of delivering a full spectrum of risk management solutions. Many of these companies are startups that require considerable help, with rapidly changing needs as the company grows. Our company, Harbor Capital Advisors, is a founding partner in Incube8.com, a technology incubator that offers these startup companies a full range of corporate services to facilitate growth and maturity. One of these services is risk management.
The problem in offering this service was finding an agency that could deliver the full range of risk management solutions, which included, for example, group health, individual life, key-person life, D&O, disability, liability (including environmental), property, fleet management, equipment maintenance, traditional property and alternative risk financing. These are only a few examples.
As implied from this example, in order to offer the required broad spectrum of services, an agency must be staffed with well-trained, knowledgeable and experienced professionals. However, the "skill sets" for professionals needed to deliver real risk management solutions far exceed the skill sets of typical producers or customer service reps in most agencies. Those agencies that do retain such skill sets have invested considerable resources to achieve this level of professionalism.
Another requirement relates to how these professionals achieve the efficiencies that enable the agency to profit from delivering their services. The key here is effective use of automation, and that requires heavy use of the Internet. Most of the traditional agency management systems do not provide the tools necessary to support the broad range of services related to client risk management. One quick example is the need for true customer relationship management (CRM), a capability that traditional agency management systems lack. Another example is the need for thorough research, which is facilitated immensely by the Internet, not an agency management system.
The final major requirement for sustaining revenue growth is strong collaborative relationships with insurance carriers and other entities that provide the products and services. These products and services are packaged and delivered by the agency as value-added components of overall risk management.
In summary, sustainable revenue growth is a key measure of agency value because it demonstrates that the agency has developed and managed a broad spectrum of resources to deliver required solutions to a marketplace that places high value on those solutions. If there is a profile for the agency-of-the-future, it is any agency that can satisfy this model. *
The authors
Paul J. Di Stefano, CPA, CPCU, is managing director and G. Edward Kalbaugh, MBA, is director of management advisory services for Harbor Capital Advisors, Inc., a New York-based investment bank and consultant to the insurance industry. They can be reached by e-mail at harborcapitaladvisors@banet.net or by phone at (800) 858-2732.
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