Planning To Plan Your Growth
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This document discusses the importance of incorporating an annual budget into a business plan using a validated budget model. It notes that while most successful agencies update their business plan yearly, only 59% of average agencies do. The traditional approach of simply adding 10% to the previous year's revenue is inaccurate. Instead, a validated budget model requires collaboration between leaders to balance organic revenue growth expectations with past production results to set achievable goals. This allows accurately predicting revenue over two to three years by considering retention rates and historical new business performance by producer. The validated budget model helps understand capabilities and growth drivers while identifying changes to achieve sustainable growth.
Planning To Plan Your Growth
- 1. A MarshBerry Publication | Volume XXVIII, Issue 7 JULY 2012 Planning to Plan Your Growth Most successful agencies utilize a business plan to drive 10% growth goal. It does not take into account retention by their business activities during the year. And while 86% department, projected growth (or shrinkage) by department or of high-growth agencies update their business plan every new business per producer to help validate the projected year, only 59% of average agencies do. Annual budgeting growth by department. In order to reduce the inaccuracies is the lynchpin of any successful business plan and most in this traditional approach and to create a more robust agencies build out their budget year-after-year, but budgeting tool, it is imperative to employ a validated budget surprisingly, many do not. This issue of the MarshBerry model into the process. Letter will examine the importance of incorporating an To build a validated budget model requires collaboration annual budget into your business plan and the value of among key agency leaders who use their experience and integrating a budget validation model. sound judgment to balance expected organic revenue growth from operations with actual production results from past FIGURE 1 Our Business Plan (check all that apply) years to arrive at a goal that is achievable. For example, if you have set a $50,000 minimum new business goal for a producer who has not produced more than $30,000 in any of the past eight 8 years, why are you budgeting $50,000 again? As much as agency leadership might want them to hit that minimum, it is completely unrealistic and renders the budget model invalid. When predicting the likely success of any producer, the best indicator of future performance is past performance. There are many benefits realized by including the production staff that is responsible for driving agency growth at the beginning of the budgeting process. Utilizing the granular “ground-up” approach afforded in the validated budget model will enable agencies to get a more realistic, accurate and attainable budget model than what can be achieved with a top-down approach. The value of building a validated budget model is that it allows you to accurately predict your revenue over the next two to three years by taking into account your retention by line (breaking it up into Commercial, Life & Health, Personal, and other buckets) and adding your new business production predictions which are tempered by looking back at historical growth performance by producer. Additionally, the model enables you to identify what changes you can make to the existing equation to drive a different outcome such as Source: MarshBerry Sales Management Best Practices Database hiring additional producers or by providing sales training to your current production staff. Of the agencies that actually do annual budgeting, many The validated budget model serves helps the agency to do so with a half-hearted approach. One popular approach understand its current organizational capabilities and entails simply adding 10% to last year’s revenue without any identify the key drivers of historical growth performance. other considerations. This method is extremely inaccurate But using a process that looks at your historical data and and rife with risk as there is no validation to support the business model is just the beginning. The model needs Continued on Page 2 JULY 2012 • theMarshBerryLetter 1
- 2. Planning to Plan Your Growth Continued from Page 1 to include additional subjective and objective criteria Now that we have established the importance of building a necessary to achieve sustainable and predictable validated budget model, we will now examine the particulars organic growth. on how to build one. First, build out the 4 basic components of the model listed below: To be successful, agencies need to pinpoint what has made them successful and repeat those things as much as 1. Previous year’s commissions & fees possible to help drive more growth. Alternatively, agencies 2. Projected new business numbers for the upcoming year can examine what has hindered their growth and how to we address the barriers to robust growth. By understanding 3. Estimated retention by department which division or product is driving your growth, you can 4. Individual producer new business capabilities change the business resource allocations appropriately and The individual producer capabilities comprise the validation focus more on certain business practices or departments. part of the model as they will help validate the projected From the outset, long-term management practices can new business numbers for the upcoming year. See Figure 2 be monitored, changed and tweaked to help the agency below for a sample screen shot of a budget validation reach its goals. For instance, hiring in the benefits division model. The following section will detail how to construct can be increased or decreased accordingly to help hit the your own budget validation model. projected growth goals in that department. Or, if you see low retention in the commercial lines department, you can expand your service offering to help improve the retention. FIGURE 2 Sample Budget Validation Model 2 JULY 2012 • theMarshBerryLetter 1
- 3. The Budget Validation Model Explained Section 1 For example, despite Producer 7’s impressive $975,000 book size, he’s only put on a total of $38,500 total in the Section 1 is broken out by department and lists the previous past two years. So his minimum new business production year’s commissions and fees. In this sample model, they only goal is $20,000. This is where the sound judgment of have commercial, benefits, and personal lines departments. senior agency leaders comes into play. It’s not logical to As you follow the numbers throughout the model, you expect Producer 7 to put on $100,000 given his last two will see that all numbers tie to the preceding numbers. years of production (barring any type of life setback which For example, section 2 adds the projected new business is assumed not to be the case in this example). based on section 1’s data. And section 3 deducts the In summary, your agency needs to determine how much commissions and fees lost due to retention. business it needs to sell to achieve its desired growth. The goal is to begin with a targeted growth number and Section 2 then dissect how to get there. Here are some simple steps Section 2 is where you input the upcoming year’s new to creating the budget validation model: business production. Again, this is broken out per department 1. List out each product that is unique to your organization. so that it is more accurate in the validation process. You’ll You will want to group each product into line items notice here that ABC Insurance is projected to grow 5% that have similar revenue streams and product in each department. You could enhance your model by characteristics. For instance, you will want to separate having unique growth rates tied to individual lines of life, group benefits and commercial lines. Do not business, versus one rate for the overall growth number. include any contingency growth in any of the numbers. Section 3 2. The next piece is building out how much net growth you would like to achieve. Section 3 deducts leakage from the commissions and 3. This step is often missed, but it is crucial to back out fees due to the estimated retention per department. It is the lost business. Input the product retention rates that important to note that these retention numbers are based you have you had historically. on retention of revenue, not retention of number of accounts. In this example, the overall retention of revenue 4. Now that we have all of the pieces, we can figure out is 91.6% which equates to $338,250 of leakage. exactly how much business needs to be put on for the timeframe used. The section between Section 3 and 4 might be the most important. It calculates the required amount of new 5. Validate the required growth numbers by listing each business your agency will need in order to achieve the individual producer’s goals for the upcoming year. growth percentages you have projected. In this example, This will help you identify potential revenue shortfalls and given the $4,015,000 commissions & fees from 2011, this assess additional growth opportunities, such as: agency will need $539,000 in new business to offset the $338,250 in leakage. a. Current producer accountability/new business b. Number of new hires Section 4 c. Increased retention Section 4 is the “validation” part of the budget model. d. Enhanced cross-selling In this section, each individual producer’s goals are broken e. Buying business out and validated based on production in several previous years. Agencies can use whatever number of years they If building an annual budget validation model will help think provides the best insight into likely new business you better financially prepare for the next 2-3 years in production by producer. every department, the question shouldn’t be, “Why would you build a validated budget model?” The better question At the bottom, the individual producer goals are summed is “If high growth agencies are building a budget validation up to show the shortfall or excess in relation to the amount model annually, why wouldn’t you?!” of new business required (this is the $539,000 between sections 3 and 4). In this example, the minimum expected goals of the producers are $64,500 short of the $539,000 Justin Berry, Vice President of Sales Management at MarshBerry required to grow the desired 5%. But the stretch goal, and can be reached at [email protected] or 440-220-5431. which is the “best case” scenario, is $56,000 over the Jim Wochele, Sales Management Analyst at MarshBerry and can be required $539,000. reached at Jim. [email protected] or 440-392-6559. As you see in section 4, the minimum expected new business numbers vary in relation to the previous two years’ production. JULY 2012 • theMarshBerryLetter 3
- 4. Supporting the FIGURE 3 MarshBerry Survey Results Execution Executing your business plan is where the rubber meets the road. An agency that employs a budget validation model will take into consideration historical new business production to establish new business goals for each producer. Then the agency will aggregate the expected new business of all producers to see how it aligns with the overall corporate growth goals. In an effort to align individual sales goals with overall corporate growth goals, some agencies add teeth to their plan by requiring minimum new business production numbers to retain producer status. A recent MarshBerry survey found that 71.2% of high-growth and 58.4% of average agencies required minimum new business goals. By incorporating producer accountability and tracking systems into the agency, executives and sales managers have real-time insight into how their producers are tracking versus goal. This insight helps agency management to direct the necessary time and resources to help any producer who is lagging behind goals, and to balance the overall agency goals with market realities. #1 INSURANCE INDUSTRY INFORMATION RESOURCE #1 INSURANCE MANAGEMENT CONSULTING FIRM MarshBerry maintains proprietary benchmark statistics MarshBerry is a consultant to over 50 of the Top 100 on insurance agencies and brokerage firms across the Brokers and over 900 of the nation’s leading insurance United States and Canada. agencies, brokerage firms and financial institutions in insurance. • 1,000+ insurance agencies and brokerage firms • $50 B in aggregate premium • Valuation • Sales Management • $4 B in aggregate revenue • Perpetuation • Producer Recruiting • Strategic Planning • Compensation Consulting #1 INSURANCE INDUSTRY PEER NETWORKS MarshBerry facilitates APPEX, BANK, TASC, MB Selling #1 INSURANCE INDUSTRY M&A ADVISORY FIRM System and RSA, which are CEO and producer peer-to- • MarshBerry is a buy-side and sell-side M&A Advisor peer exchange groups committed to driving organic • 29% of total advised M&A deal flow since 1999 growth and value. • 287 M&A Transactions with the Top 100 Brokers • 185 insurance agencies and brokerage firms • 163 Bank Insurance M&A transactions • $30 B in aggregate premium • 690 total M&A transactions closed • $2.5 B in aggregate revenue • 90 due diligence projects on closed transactions • #1 ranking by SNL for each of the past 15 years