Is Your Agency at Risk: Part One

agency risk issues profitability vulnerability Feb 04, 2016

This reminds me of the story about the Cobbler’s children who have no shoes. This phrase is used to describe the phenomenon where professionals in any given area are so busy with work for their clients and their teams that they neglect using their professional skills to help themselves or those closest to them. Think of the web designer that hasn’t finished their website, or the accountant who is late in submitting his own tax return!

A great friend of mine, who’s also a great client, asked me an interesting question recently. “After all these years of consulting with independent insurance agencies, what are your greatest concerns for them in the future?” My immediate reply: Vulnerability tied to Profitability and Perpetuation.

Agency Risk Issues

Although they are not the only ones, I believe that vulnerability, operating profitability, and perpetuation are central to the greatest risks facing approximately 95% of IIAs. Unfortunately, these are issues that most agencies are not addressing.

Vulnerability is pretty simple and largely driven by Praeto’s Principle. If you’ve followed me at all through the years, you’ve heard me discuss the 80/20 Rule about a million times, but I sure hope you’re not like most agency owners who say, “That’s not my agency!”

I recently visited one of the best-run agencies I’ve ever seen and was absolutely wowed by what they’d done — and I’m not easily impressed! In just six years, the new owners had grown from $1 million to over $5 million with a profit margin five times that of the average agency.

When I took them through one of my newest tools, The Agency Risk Assessment, there were only a handful of things that put them in a high-risk situation. One was that they had never completed their 80/20 Analysis.

We quickly determined that they are vulnerable (at risk) because the top 5% of their clients were generating 45% of their revenues. While that is better and more balanced than most agencies, they were still very vulnerable. After all, if they lost the top 5% of their customers (45% of their revenue), it would be extremely difficult to cut expenses fast enough to make up for the lost income.

Now take a look at your own agency. Are you vulnerable by not being aware of your 80/20? Do you distinguish the vital few clients from the trivial many? What else can make you vulnerable and put you at risk?

Next Week: Part Two – The Profitable Subsidizing The Unprofitable

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