Adjusting Expectations

Things have changed at Moore & Johnson in Raleigh, N.C. No one just hops in the car anymore to take a client to lunch; no one casually announces they’ll attend an outside meeting. First, they ask for approval. And they don’t get it unless they make a good case for spending the money. “We’re taking a different approach to our budget in every area,” says Charlie Hoover, president of this multilines agency with more than 20 employees. “We’re looking at all our flexible expenditures and asking if we really need to spend that money to make our agency grow.”

Donations, client meals, bottled water—even office holiday parties are doing a disappearing act as agencies strategize for 2012. No one’s cutting the power or turning off the water, but amenities long taken for granted are making a quiet exit. “We can’t control some things, like the cost of health care coverage for our employees,” says Hoover. “But for the costs we can control, the level of justification for spending the money has gone up a good bit.”

Of course, budgets aren’t composed entirely of expenses. They also include revenue projections and capital allocations, and agencies are redrafting blueprints for all three. Some are focusing more closely on revenues, analyzing niche markets, niche products and specific accounts for their potential to produce increased revenue. Capital expenditures, meanwhile, are moving forward only if money to pay for them is already in the bank.

Combined, these measures constitute a studied approach to budgeting that takes more time and effort. “The best budgets are built from the ground up,” says Brian McNeely, an accounting expert and consultant with Reagan Consulting in Atlanta. “Start at the account or producer level and build from there. It might take more time, but it helps you understand your agency’s reality, as opposed to what you think that reality might be.”

McNeely consults frequently on agency budgets, and one of the most progressive approaches he has seen involves a deep look at profitability by producer. The results are sometimes surprising. “Large accounts don’t necessarily translate to profitable accounts,” he explains. “If an account isn’t priced right, you may not be making a profit, depending on the services you offer.”

Commercial property-casualty accounts are particularly demanding of services that range from certificates of insurance to claims-processing to risk management. Life accounts require actuarial services, while benefits accounts may require wellness consulting or other programs. “If you’re giving these services away, you need to realize there are big costs associated with them,” says McNeely.

If your producers are involved in delivering these services, he suggests a review of this practice as well. “Producers are best at selling,” says McNeely. “But when it comes to providing some of the services that customers require, the producer doesn’t necessarily have to do the work in question; he or she just needs to make sure the work is done.”

Come up with an allocation of services that works for the agency and its clients. You may not want to track the service time spent on every account, but McNeely thinks it’s important to track those accounts that are labor-intensive. Doing so and understanding the costs involved might help identify opportunities for setting or increasing fees. But as McNeely cautions, fee-setting or fee increases should be handled on a case-by-case basis. “You have to understand the [cost] drivers and expectations of the client, and if you have a strong relationship, work with them to address the situation,” he says.

Jeff Haney wants to better understand both the cost drivers and the revenue drivers at his agency. That’s why the treasurer of Edwards, Church & Muse Insurance, a 60-person agency in Charlotte, N.C., asks managers and producers in benefits and personal lines to help with the budgeting process. Says Haney: “I ask them to look where our business is and at what’s been happening there.”

He takes a different approach in the commercial lines department. There Haney asks producers to draft their own budgets for their books of business. “They know their book better than anyone,” he reasons. “They know if they have clients that will lay off or clients that will grow; they know if there are clients they may lose.” Haney sits down with each producer and helps finalize each budget. Then the figures are added together and the combined budget is posted in the front of the department. “Oh yes, we hold them to it,” he says. “It helps me know what will happen with individual books and to put new-business goals on top.”

Meanwhile, the agency’s annual baseball game and overnight producer outing have been cancelled and its holiday parties curtailed. “Yes, these are fun things, and we’ve stopped doing them,” admits Haney. “But we [haven’t] cut anyone’s pay and we haven’t had big layoffs and a number of our competitors have.”

Three years ago, Craig Ryder, COO/CFO at Scott Insurance in Lynchburg, Va., asked producers at this 240-person firm to take a hard look at their controllable expenses, and they complied. He has been making the same request each year since. The agency also stopped issuing pay raises three years ago and has yet to restart. “We’ve reworked our budgets down significantly,” says Ryder. “But we haven’t laid people off or cut back salaries, and we have competitors in the region who have done both.”

Two years ago, the agency gave extra time off in lieu of raises and bonuses. Then last year, commission on a large piece of non-recurring business was paid out in the form of a 3% bonus across the board. “The immediate cash was important to our people,” says Ryder. “We try to do whatever we can to give them something.”

Dan Menzer thinks a lot of agency owners will be able to do more for their employees soon. Menzer, a partner at Optis Partners, Inc., in Chicago, says his firm is seeing the first signs of a hardening market. “All the storms have clearly affected carriers and reinsurers,” he says, “and that creates impetus for a firming of the market.” Until carriers decide they have insufficient capital or their investment yields fail to offset losses, “they won’t do anything,” Menzer adds. “But what we’re seeing now is that prices are firming in spots, in lines of business, a little bit here and there.”

That’s not to say agents should change their budgeting process. Menzer says examining the business environment and setting realistic projections are important processes in any good budget. What should be adjusted, he believes, are expectations. “With the possible firming of the market, maybe agents can start planning on some things they haven’t been able to for the last few years,” says Menzer. Things like flat renewal prices and organic increases. “It’s time to ramp up the expectation of real growth,” he says.

To pinpoint growth potential, Menzer suggests running reports on your agency management system of your agency’s top 300 accounts. Include renewal dates, installment dates and figures, and audits for each account. “Have the data available so that if you get to a certain point and you’re off budget, you’re not scratching your head,” he says. By checking your report, you can see where projections failed, and reforecast. You can also spot other situations that, without data, might be misleading. Says Menzer: “Wouldn’t it be good to know if you came in $10,000 off budget this month, that $9,500 of it was because a client renewed late—or early?”

A firm believer in capturing actual and budgeted client revenue each month, Menzer says that management systems integrating accounting and customer data should have revenue-reporting functionality. If your system does not have it, ask your vendor to create it. “Then you can also perform client profitability analyses that show who is using services you may not be getting paid for,” he notes.

While budgeting is an opportunity to slash waste, you don’t want to cut so much that when the economy strengthens, you’ll be unprepared. At the same time, though, you want to be as efficient and cost-effective as possible. McNeely frames the situation: “Financial discipline is a cornerstone for independent agents to remain independent. If they don’t build it in, their independence is at risk.”

What if you could hire one or more assistant CSRs and use them only when your processing department develops a backlog? You’d pay no benefits, nor would you provide work space or equipment—and your new hire’s taxes would be paid by someone else. If it sounds too good to be true, you may want to learn more about “virtual assistants.”

Grainne (pronounced GRON-ya) Foley is CEO of Live-Hire (www.live-hire.com), an online personnel service with a large database of skilled workers who work remotely. Asked if using virtual assistants rather than increasing headcount at an insurance agency might be cost-effective, Foley said, “I’d imagine the savings would be huge. With a virtual assistant, you only pay for the number of hours worked. And from [a] customer’s perspective, it’s as if the VA is in your office.”

Foley says she works closely with clients to learn exact specifications for the work involved. She then contacts “VAs” in her database whom she has already pre-qualified—or she looks outside the database if necessary. “I find those who can do the work, and then get back to the client and present them with two or three people to choose from,” says Foley. Once a choice is made, the VA goes to work.

Foley says many VAs are mothers who work from home. They may already have and use the software that clients require, or they can use software the client provides. “It’s easy,” says Foley. “You can set up an 800 number or have calls forwarded to your VAs. You can also set up an answering machine.” Or, you can send and receive all work electronically.

“Virtual assistants can do anything and everything: marketing, setting up social media profiles, driving traffic to your website,” Foley says. Clients specify the budget for their virtual assistants and hours to be worked. “These things are up to the client 100%,” Foley says. “And if you need someone really quickly, I’ll look for them.”

Live-Hire is just one of numerous online services that offer virtual assistants.

—S.H.