Is Your Agency Strategically Planning for Long-Term Producer Succession?

Part One: Internal Growth Challenges

In this first installment of our two-part series, we delve into the top and bottom-line growth challenges agencies face on an annual basis and why a long-term strategy for new producer recruitment and development is vital.  Most of the challenges listed have always plagued the industry but given the number of new entrants into the marketplace, particularly those that have placed an emphasis on external growth, the need for developing home grown production teams is a process that must be addressed sooner rather than later. 

Although experienced agency owners and leaders may consider the following information to be remedial, the purpose of this article is to remind everyone of the persistent hurdles that impede internal growth. In the second part of our series, we will delve into the necessary steps and processes to effectively build and train a team of future producers.

Agency and Producer Acquisition Pipeline

In California, the pool of viable acquisition targets and potential producer acquisitions is steadily shrinking, signaling a shift in the industry landscape. Over the past decade, intense acquisition activities and the migration of producers to rival agencies have depleted many of the remaining available options in the state.  Agencies that have deliberately chosen to preserve their independence (for now) or have opted for internal perpetuation options do not appear inclined to change their stance anytime soon.  Furthermore, for those agencies that have been acquired over the last decade, specifically in California, more and more producers have been included in the sale.  If the purchasing agency has followed the necessary steps to tie that producer to a legitimate purchase agreement, it will be more difficult for that producer to move to another organization.  Acquisitions will continue to occur, but they are unlikely to replicate the scale or attract the same level of talent as seen in previous years.  As both external agency and producer acquisition slows down, an emphasis on internal growth will be required. 

Acquisitions Nearing Earn-Out Status

Acquisitions are clearly effective, but they are also inevitably about solving someone else’s perpetuation issue.  Agency principals dedicate their entire lives to building an asset, and after selling it to a third party, they often find themselves working even harder than before to maximize the value of that asset, and to achieve a final earn-out.  But what happens after the earn-out is complete?  Having been involved with an organization that has a history of growth through acquisitions, it is often observed that agency principals and producers who received proceeds from a sale tend to gradually reduce their pace, leading to two notable consequences.  The emphasis on actively seeking and securing new business decreases, while the risk of losing existing business increases.  It is an inevitable outcome and considering the years these individuals spent building books of business, it is understandable that they would slow down.  That doesn’t change the fact that with senior producers decelerating, there will be a need for others to step up and take on the responsibility of pursuing new business.

Existing Producer Challenges

In addition to the task of finalizing earn-outs, agencies grapple with a range of persistent challenges within their production teams.  These challenges may vary depending on the size of your organization, but can include retirements, producers struggling to push through plateaus, the inability of producers to manage larger books, and experienced producers encountering occasional downturns in performance.  When handled properly, retirements can actually be beneficial to your organization, creating opportunities for emerging producers to step up and assume greater responsibilities (more on this in our second article).  Producers who plateau will always be a challenge, since not every producer possesses the drive or capacity to manage a million-dollar book.  As for down years, even the best producers underperform periodically, highlighting the inherent fluctuations of the industry.   

Annual top and bottom-line budget discrepancies

For agency principals, the budgetary clock resets at the beginning of each year, bringing forth a familiar array of challenges that impact both the revenue and expenses of their agencies.  Prior to the start of a new year, team leaders and department heads are tasked with thoroughly evaluating factors that will impact their budgets, including lost business, adjusted rate projections, retention objectives, miscellaneous expenses, accounts from the previous year that will not contribute to future commissions and the expense of hiring new producers.  Furthermore, the calculation of contingent and incentive commissions becomes critical, as they are susceptible to being positively or negatively influenced by the aforementioned factors.  Every agency starts the year in a hole.  The question is, how big will the hole be?

Top and Bottom Line Budgeted Goals

Most agencies budget with expectations for internal growth.  If an agency is fortunate enough to have exceptional rate and retention percentages in a particular year (let’s use 95% as an example) the hole to be filled at the start of the year is 5% of prior year top line revenue.  Now include the budgeted expectations for internal growth.  An agency budgeting for 5-10% internal growth must generate new business equaling 10-15% of the total agency revenue in a 12-month period when including prior year runoff business. Without an adequate number of active and motivated producers, how will this objective be met?

Now is the Time to Start Recruiting and Developing Producers

To reiterate, nothing illustrated in this article is new. Agencies and brokerages have been successfully overcoming these obstacles for decades. However, those who have been most successful in doing so have had a defined plan for internal producer perpetuation. Those agencies also know that hiring and training new producers requires time, financial resources, a commitment to education, and a cohesive organizational strategy. In our next article, we will delve into best practices for building a new team, and how to achieve success in an increasingly “work from home” environment.