Tag Archives: consultants

The Consultants Are Here to See You…

If you are running an insurance claims operation, and your boss or the board brings in outside consulting experts to evaluate it, chances are you have a problem. Not just the problem the consultants are being called in to examine but a pricklier, more personal problem–a perception problem. Someone with some clout in your organization apparently doesn’t believe you are capable of doing whatever it is the consultants are going to be doing.

That puts you in a tricky situation, one that demands thoughtful action.

First off, don’t try to convince your boss or the board that you are an expert and that you don’t need outside assistance. Don’t waste time arguing that your training and years of experience managing claims qualify you for the challenge. Do understand that the decision has already gone the other way, and any attempt you make to reverse it looks like resistance, concealment, perhaps even cluelessness.

Think about it. If you argue that there is no problem, or the problem is outside of claims, or that every claims operation has the same problem, you risk being classified as stubborn and averse to change. Don’t protest that you have already diagnosed the problem and designed a solution; others don’t see things that way.

They want another opinion, another perspective. Maybe they don’t like your plan, or perhaps it conflicts with some other course of action they want to pursue. It could be they don’t quite know what the problem is, but there’s something troublesome in the loss numbers, and they want to understand why it is happening and what to do about it. Or, worst case for you, they might just be looking for evidence and justification for overhauling your organization and escorting you out the door.

The reason really doesn’t matter, but your response does. As activist and author Jerry Rubin once said: “The power to define the situation is the ultimate power.” You have the power to assist in framing the inquiry and shaping the outcome by being visible and playing an active, cooperative role with the experts during the engagement. Take advantage of that power.

First, welcome the consultants and make arrangements to provide them with whatever help and information they need. Brief them fully on your organization, your strategy and your operating procedures. Impress them with the dashboards and controls you use to manage risks and results. Talk to them about process efficiency, effectiveness and loss-cost management techniques. Show them how you establish and monitor key performance indicators and how you interact and communicate with your stakeholders. Demonstrate how you identify and incorporate best practices in your claims handling processes. If some of the consultants lack industry knowledge and have no background in claims–don’t be dismayed. Instead, patiently take the time to make sure they fully grasp how your company functions and how your operation contributes to results.

In other words, do whatever you can to provide the experts with plenty of evidence supporting the proposition that when it comes to running an insurance claims operation: 1) you know what to do, 2) you know how to do it and 3) you are doing it, quite well.

The consultants’ job is to identify performance gaps and root causes and propose actions to close those gaps. Your objective should be to provide them with the information, the insights and the support they need to do that job well. People who hire consultants usually believe the consultants will bring very high levels of knowledge, objectivity, credibility and perceptiveness to the engagement. While that belief might not always be accurate, the reality is that consultants’ findings are accepted as authoritative in most cases. That means their recommendations will affect you and your organization, so it makes sense for you to invest your time and effort into framing the inquiry and shaping the outcome. Give it your best shot–you might even learn something in the process.

The downside is that in tricky, prickly situations like this there is no guarantee things will turn out well even if you do everything right. Sometimes there are hidden operating agendas, foregone conclusions and predetermined outcomes underlying the consulting engagement, and unless you know about those factors going in, there’s not much you can do to manage their impact.

A Bizarre but Common Strategy: Hiring Incompetent Producers

Hiring incompetent producers is apparently the strategy of a group of agency owners who told me that my advice that no producer is better than a bad producer was:

  1. Just wrong
  2. Too harsh
  3. Short-sighted

I have seen some consultants make the same case, so I thought I should have an open mind and reconsider my position.

The consultants’ point was that every commission dollar sold is worth (pick a multiple) 1.3 or 1.5 or 2.0 times. That makes every commission dollar a commodity. From the agency owners’ perspective, one way to build value is to put as many commission dollars on the books as possible because the value is same regardless of whether the sales are profitable or unprofitable. The value is not affected by whether the sales are personal lines or commercial, whether the accounts carry more or less E&O risk. All sales carry the same value, in this perspective.

Some people will argue I have taken the consultants’ and agency owners’ point too far, but that is impossible. Remember, their point was that poor producers, meaning unprofitable producers, still have enough value to justify keeping them. This means that even if the producers’ sales have a negative 20% profit margin, which is common, the consultants and agency owners believe these sales have the same effective value as books of business with a 20% profit margin.

The strategy of adding sales without regard to profitability is quite relevant if the agency can grow fast enough and sell itself quickly enough. More than one such flip has made an agency owner wealthy. The key is how long the producer is with the agency before the sale. Let’s say that at the end of five years a producer has generated $150,000 of commissions. The profit on this book is (using industry standards for agencies with $1 million to $2 million in revenue):

incompetent

 

This excludes all administrative wages such as the bookkeeper, receptionist, claims and so forth. It excludes ANY owner compensation. It understates the CSR compensation, too, because the average commercial CSR makes much more than $35,000. If we include these real additional expenses proportionately, this book likely is still losing money in the fifth year, anywhere from $10,000 to $30,000. Losses in the prior years were even greater as the book was built.

Over five years, then, the agency has likely lost between $75,000 and $150,000 net. Using $75,000 and a one-times multiple and an agency sale in year five, the agency still nets $75,000 (($150,000 times 1.0) – $75,000) = $75,000.

But if the agency hangs on too long or the five-year loss is too great, this strategy fizzles. So to make this work financially, the agency owner has to have a firm and fast exit plan.

Why not hire quality producers initially? Then the agency gets profit and value simultaneously. Besides, who in their right mind would pay the same multiple for an unprofitable book as for a profitable book? Let’s use an EBITDA example. If the profit is $25,000 and the EBITDA multiple is six, then the value is $150,000. What is the value of a book with a loss of $25,000 and a multiple of six times?

Why would someone pay the same multiple for a low-profit book as for a high-profit book? Maybe the thought is that books all average out. But why do they have to average out?

A poor producer cannot take an entire book, even most of a book, with him if fired. If the producers were so good, they would not have been fired. So agency owners can eliminate unprofitable producers and reassign their books to staff or other producers at lower commission rates, which is common when books are transferred between producers. This is a key secret to the success some serial acquirers have achieved. They completely understand that poor producers are unnecessary so when they buy, they fire and they keep the business but make it profitable. Even if 20% is lost, that is 20% losing money vs. 80% making money.

I truly feel for agency owners struggling to find quality producers. If it was easy, everyone would do it. Is hiring poor producers really the solution, though?

My experience, and I’ve seen the hard data, is that when agency owners properly prepare their agencies for finding quality producers, use the right interviewing tools and tests and create a quality development/management plan, successful hire percentages quadruple. All the work — and it is a lot of work —  is before the hire, and, given all that agency owners already have to do, finding the time and energy for this key element is not so easy, but it is essential if the goal is to truly build profit and value.