AGENCY FINANCIAL MANAGEMENT
By Paul J. Di Stefano, CPA, CPCU
Analyzing needs, costs and benefits
The costs of an agency consulting services project may range from a consulting assignment billed on an hourly basis ... to more complex efforts--such as merger and acquisition representation--which are typically heavily based upon success fees.
Agency principals who consider utilizing consulting assistance generally do so either because they are dealing with serious internal issues or they are evaluating external strategic opportunities. While some agencies make regular use of consultants, others have a harder time deciding whether agency consultants are warranted. The primary concern of this second group of agents is the cost of these services and how to view and justify those costs.
The decision to use an agency consultant is at times obvious, such as when an agency appraisal is needed or an expert witness is required in litigation situations.
What I would characterize as the "discretionary" use of an agency consultant involves mergers and acquisition representation and strategic planning. Although some agents are quick to dismiss the idea of utilizing a consultant, agency principals would generally do themselves a service by carefully evaluating the benefit of such action. There are a number of key factors which agency principals should consider when making a decision to hire an agency consultant.
Required skill sets and resources. Agency principals should carefully consider the skill sets and other resources needed to effectively address internal issues or external opportunities. Some agents have a close relationship with their accountant or attorney or both and may tend to routinely turn to these professionals. The difference is that agency consulting organizations such as Harbor Capital specialize in working with agents and brokers and have developed unique skill sets which qualify them to assist clients in the areas of financial or operational consulting. Agency principals are wise to assess the consultant's track record on a specific type of project.
Availability of internal resources. Agency principals should make a determination as to what resources are available within the agency which can be tapped for a project. These resources may limit the scope of a consulting engagement. However, our experience has shown that even in the event that those resources are available, it may be decided not to allocate those internal resources from other important agency projects.
Opportunity costs vs. consulting fees. We have had many clients come to us after much frustration in negotiating a merger transaction where the process had not been managed properly and both sides were getting further and further apart. The unproductive time agency principals spend spinning their wheels and not accomplishing their goals is basically an opportunity cost. Their time could be used more productively in other areas. In the case of mergers and acquisitions, there is a cost associated with not being able to consummate a transaction that would benefit the agency.
Time constraints. Time constraints are an important factor when making a decision whether or not external assistance is required. In the case of an acquisition opportunity, the agency typically needs to be able to move quickly in evaluating that opportunity. Once a deal is agreed to, the agency must have the people resources to perform due diligence. Integration plans are also paramount when a transaction is imminent. For example, in a recent transaction, one of our client's major concerns was whether the agency to which he was moving his book of business had the ability to make an efficient transition from an agency currently servicing his accounts.
Sounding board. In many cases, the agency principals have a good idea of the general direction they are going when evaluating external opportunities or dealing with serious internal issues. Having said that, agency principals routinely tell us they feel more comfortable having input from a third party on actions the agency is about to implement. In addition, when utilizing a consultant, agency principals also have the chance to share confidential information and personal issues they may be unable to discuss with others in the agency.
The costs of an agency consulting services project may range from a consulting assignment billed on an hourly basis--such as an agency appraisal--to more complex efforts--such as merger and acquisition representation--which are typically heavily based upon success fees. In merger and acquisition engagements and market finding engagements, much of the payment of fees is contingent upon a successful conclusion, either a sale or the securing of a new market. While the success fees ultimately may be larger than those charged on an hourly basis, they are paid only after a successful conclusion.
The wrong first question to ask when discussing a possible engagement with a consultant is, "What will an assignment cost?" The question should be, "How can your organization help our agency?" This may seem like a cavalier statement, but the reality is that if a consultant helps the client achieve its goals and add value to the agency, there is in all likelihood a fee structure that is appropriate and justified.
One of the toughest things for a consultant to assess early in a project is the amount of time that must be devoted to a project. In some cases that can be solved by agreeing to hourly consulting fees, but some clients prefer to quantify fees upfront.
To address these concerns, we at Harbor Capital attempt to look at a project in phases. This accomplishes two goals. This approach allows the client to begin to feel comfortable working with us, and we as consultants are better able to keep fees in line with the commitment of hours needed to complete the assignment. Each phase of the project entails what we refer to as "deliverables" or what we jointly agree with the client will be delivered during that phase. In many cases, the first phase of an assignment entails completing a strategic profile on the agency which enables us to fully understand the client's business model and how that model relates to the internal issue or external opportunity being addressed.
In summary, agency principals are understandably cautious when considering agency consulting services. In making a decision, clients should take into consideration the primary components that go into a cost benefit analysis (discussed above). Two components that are often overlooked in assessing cost vs. benefits is the hidden opportunity cost of agency principals' time devoted to a project as well as the cost of not converting opportunities into realities. Looking at projects in terms of phases is helpful to both agency consultant and client in rationalizing a project and its costs. While internal resources may be available, the decision must be made as to the best use of those resources. *
The author
Paul J. Di Stefano, CPA, CPCU, is the managing director of Harbor Capital Advisors, Inc., a national financial and management consulting firm which offers services to the insurance industry. Services include agency appraisals, merger & acquisition representation, strategic and management consulting. Harbor Capital Advisors, Inc., can be reached in New York at (800) 858-2732 and via its Web site (www.harborcapitaladvisors.com).