FOR MANY AGENCY OWNERS, CROSS SELLING IS A MISSED OPPORTUNITY - Part 1

Insurance Journal, March 21, 2005
Author:  Steven S. Wevodau

Amazon.com has a message for agency owners.  When ordering a book from the popular Web merchant, scroll down the page and see the boxed items under the heading “Customers who bought this also bought…”  Is this amazing wizardry made possible by high technology?  Maybe.  But it’s also the product of an agile sales mind finding ways to grasp at opportunity.  This article discusses an overlooked way you can be like Amazon, and practice cross-selling in business.

At this point in the industry cycle, it’s a good time to get creative.  Increasing concern over the long-term viability of contingents following the settlement between Marsh and the New York Attorney General’s office is certainly the highest profile worry.  Besides this issue, many market factors also are at work.  Rate softening persists in many product lines, with no immediate end in sight.  Increased competition continues, particularly for middle-market clients and consumer confidence is on the downturn.

Look to the horizon

In many cases, agency owners choose to stick with their niches, which is certainly a viable strategy during good times.  But when facing tough competition and product slippage, consider horizontal product and service sales opportunities. 

Most middle-market P/C operations provide a predictable set of products to their clients.  Thus, it’s hard to establish differentiation between your firm and one down the street.  Clients are becoming more transient and more sophisticated about solving risk problems.  Today, clients require more insurance options and coverages than many agencies have to offer.  This is especially true of a commercial client.

The solution to this increasingly common situation is cross-selling.

This article will discuss how to structure a successful cross-selling program, and Part Two will address the keys to success, pitfalls, and what to expect in the way of marketplace response. 

Here’s a hypothetical: A commercial client wants to provide long-term care for employees, or a more comprehensive policy for executive management.  Or perhaps they would smile upon additional perks for the executive team offered by a disability income program.

Beyond benefits, many executives could benefit from a package of financial planning tools, such as wealth transfer, estate planning, or insurance that would fund repurchase liabilities within an ESOP.  Look at these options holistically, perhaps offer to design a complete program of executive benefits.  Don’t worry if the skills are not available in-house yet. 

Think about the rest of the employees at the client’s firm.  They certainly purchase personal lines coverage for their homes, auto or life insurance needs.  Is this something you can provide?  How about group benefit insurance?

If the client is interested in alternative risk financing, offer to be the link for the third party administrator services for the client’s self-insurance programs.  How about offering access to captives and risk retention group solutions?

How to get there?

When considering how to offer new products and services, many agency executives see a big learning curve, and an even bigger capital investment.  That comes from the “I need to acquire a firm with these skills, or hire someone who has them” camp.  There is a better way. 

The best solution is often to enter a joint venture with two or three other firms who share the same geographic footprint but have disparate core product specialties.  Compare this route to the two other options: acquiring or hiring.

An acquisition might be an attractive option to some.  With the cost of capital low, many firm owners see it as a way to build a more diverse business.  But this route actually could be more costly, because it definitely presents greater economic risk. 

If an acquisition is chosen, try the joint venture route first.  See if the situation is workable, and build in some safeguards.  A first right of refusal under change of control or exercisable call/put options ensure that the investment in the relationship won’t be for naught.  It might not be romantic, but it will in many cases create greater immediate economic returns and less stress over the potential success of an acquisition.

Perhaps hiring new staff sounds like the best route.  But there exists a speed-to-market issue.  Even the most successful producers typically require two or three years to build relationships and get systems operational.  Consider that initially the wrong specialist may be hired, and the firm must absorb the expense of having to go back to the drawing board.  Consider also that the new products and services will have back-office technical requirements, and accessing a new market is time-consuming and carries costs. 

Creating a unified front

Joint ventures are contractual relationships among several parties that typically operate under a common, branded, fictitious name.  The relationships can be highly customized, addressing each firm’s issues over ownership, operations, revenue and risk-sharing.  Such an arrangement, if structured properly, is paying dividends for firms throughout the industry every day. 

One way to structure it is through a contractual referral agreement, which does not create an actual joint venture.  In this situation, clients will perceive that they are getting service from two separate entities, and may be suspicious of “referral fees” adding to their cost.  In a true joint venture, the resulting company is considered a common business entity from a legal perspective.  Cohesive branding ensures that clients will feel they are receiving a complete, undiluted package.  Along with working together under the joint venture name, each partner also may retain its own ownership structures and operations. 

Strategically, the best option is to aggregate core product skills among several firms and to funnel all those products and services into the new, rebranded entity.  This minimizes shareholder risk and enhances the change for reciprocal cross-selling among two or three firms.  It adds economic value to each firm, as they are able to lower their client acquisition costs through the relationship.  And it creates greater client leverage, which should increase retention rates and profit margins.

While a joint venture is not the answer to business growth in every situation, many markets contain this untapped potential.