In this episode of “The Digital Broker,” Ryan and Steve examine one of the most important components of measuring an agency’s success: measuring growth. They examine the three typical ways in which agencies typically measure growth (new, retained, and lost business), and why it is so important to define and understand these categories. The hosts also offer guidance on how agencies can use data to gain better insight into growth— and to use that data to create simple, actionable plans for improving profitability.
In this episode of “The Digital Broker,” Steve Anderson and Ryan Deeds examine one of the most important components of measuring an agency’s success: measuring growth. What does it mean to “measure growth” –and why is it so important to an agency?
Traditionally, agencies looked heavily at new business to determine growth. They looked at what a producer sold and paid on that. (1:20)
Ryan advises that agencies today should look at multiple facets, and he suggests dividing business into three distinct “buckets” (new, retained/kept, and lost). He defines those buckets as:
- New: Business that we have today that we did not have yesterday
- Retained/Kept: Business that we had yesterday and that we still have today
- Lost: Business that we had yesterday that we do not have today
By thinking in these terms, it becomes easier to understand retention overall and it makes each one of those buckets a little more effective. (2:15)
Types of Business and How to Measure
It’s relatively simple and straightforward to measure growth when an agency brings in a new account and books the revenue into the system but what happens when there’s new business from an existing client? That becomes a bit more complex. How should that be measured?
There’s a rising trend for agencies to measure growth based solely on the number of new client relationships added every year. In this system of measurement, producers will still get paid when coverage is added onto an existing client but these additional coverages won’t be including in the agency’s overall growth metric.
At the end of the day, whatever metric an agency ultimately uses to determine growth, it’s important for the agency to cleanly delineate how the metric is derived. Doing so helps take away the nebulous nature of the conversation about growth, especially for those who have a vested interest such as producers. (3:00)
Retained business is more difficult to measure than new business, making it all the more important to maintain a separate bucket for this activity.
With retained business—depending on how an agency measures it—an agency can actually lose money while keeping clients. For example, you could retain 100% of your business during a soft market yet still generate lower revenue. And, if an agency is not driving operational excellence and efficiencies, their profitability could also decrease significantly as a result. In these cases, a decrease in workload doesn’t correlate with a reduction in revenue!
Although retention may be more difficult to measure, it’s a big step in the right direction if an agency can confidently say, “these are the clients that we had, these are the clients that we have today, and here is the revenue difference.” (5:10)
Ryan explains that although agencies may use any number of different metrics to measure retention –the most frequent being revenue, policy count, and number of clients—it is critical that agencies use data and put processes in place that provide a good understanding of total revenue coming in. If an agency is using booked revenue alone, then they’re actually looking backwards, so it’s imperative that they have some sort of written revenue number that’s being aggregated.
As an example, if it’s January and an agency has a $12k policy that expires in December, then the agency is hoping they’ll collect the $12k but they still must keep up with this activity throughout the year. To do this, it requires the agency to implement business processes, educate the staff, normalize data, and define terms. These are all practices that need to be put in place but many agencies have not yet done so.
This can create a huge problem for an agency because if you’re unaware of what you’re supposed to be collecting, then how do you know if you are being shorted by the carrier or if you are collecting the right amount of money? For these reasons, using booked revenue as a key metric is very challenging, especially with the increasing move to direct bill. (7:00)
Agency billing is an easier way to measure retention because you are invoicing in the system. The system is tracking your commission income, what goes through to the carrier, etc. This all goes back to direct bill tracking and reconciliation, which are both very important to understand in terms of booking or understanding the total revenue coming through. (8:20)
When Ryan consults with an organization, he first asks, “What’s your process for determining the amount of revenue you expect to collect for an account that locked in on January 1st for $12k?” He will then drill down on the organization’s current processes to identify areas for improvement.
Another reason comparing how an account looks this year vs. last year can be so difficult is due to agency management system’s lack of recognizing changes in a policy or an account’s billing during the policy term (e.g., endorsements). This makes it difficult to identify what an account looked like last year, what it looks like so far this year, and what an agency can reasonably expect next year.
Ryan takes the estimated (or written) revenue and bounces that against what the agency has already collected, especially on direct bill policies. So, for example, if the agency is supposed to collect $12k, and by June they have already collected $15k, then account managers can see this and correct it. To do this successfully, the estimated revenue needs to be correct. (9:02)
Using Data Management
The mechanism that Ryan uses at his agency allows for tracking activity and making it visible to the account manager. The mechanism is a dashboard on the account manager’s system which includes five or six different audits, one of which is called “underestimated.” This audit is comprised of a bar chart that shows any policies where the account manager has booked revenue that supersedes the estimated revenue. The account manager can then go in and make the necessary corrections and ensure everything trues up.
Another benefit of managing data in this way comes from the dashboard’s ability to highlight any differences. This allows the information to be more accurate as it flows up to management and allows management to have better trust that these numbers are as correct as possible.
This type of technology (along with tech, as a whole) is a great way to build employee engagement. It shows agents the weight they carry, the weight they hold in an organization, and lets them monitor everything they touch. Account executives will begin to pay more attention and the agency can now use data to better understand what’s needed to succeed. (10:20)
How to Measure Retention?
After writing numerous retention reports, Ryan quickly determined that you can’t depend on human coding in the system to measure retention. He began using “snapshot logic” to measure retention, looking at where the agency was January 1st and where they are currently. He’ll then run the following metrics against that: (15:07)
- Actual Clients
- Policies in Force
- Client Revenue
First, when looking at actual clients, any business the agency had January 1st and still has today would fall under “retained business.” This holds true even in the case where the policy count or revenue may have decreased significantly (i.e., even if an account had 20 policies January 1s and now has one).
Second, he looks (to some extent) at policies in force, as it might be an indicator that a client is about to leave.
Third – and most importantly – he looks at client revenue, because it’s the easiest metric to measure. In a case where a client takes four policies and rolls that into one, the agency may have a reduction in policy count but an increase in revenue. The reason for this change is easier to identify.
A myriad of factors may contribute to why an agency loses an account. Many of these reasons are external factors (e.g., price reductions/soft market, M&A activity) that an agency can’t control and really can’t do too much about. (18:05)
That is why Ryan advises agency principals to shy away from assessing culpability. Rather, they should focus more on identifying and understanding what business they had yesterday that they don’t have today so it can be shored up. By not focusing so much on why the business was lost, it decomplicates retention.
If an agency cannot identify and understand what they are losing—both from a net change in retained business and in overall lost business—they will not be able to successfully determine and project growth.
Although it is important to go back and look at lost business to see if there was a trend, typically accounts are not lost due to service issues. The service at most agencies today is adequate enough that they can maintain the majority of these accounts.
Part of identifying lost business is identifying process problems and putting systems in place to address these. Steve and Ryan both share anecdotes about how they’ve done this, for example, by looking at lost accounts and then identifying process problems, they were able to put scalable mechanisms into place and increase retention rates significantly.
The Single Best Tactic to Get a Handle on Measuring Book of Business
The best way for agencies to get a better handle on measuring their book of business right away is to start by looking at where they were January 1st this year. They should get a list of what their active book looked like January 1st and compare that to what it looks like today. This can be done in Excel, and it’s a pretty straightforward way to create the three buckets discussed earlier. By doing this, agencies have a snapshot they can use going forward, and it will help determine growth and highlight what they have lost. Even if revenue numbers are wrong, agencies can still figure out what clients they are losing. (22:50)
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