Episode 345: The Insurance Agency Growth Trap: Why More Revenue Doesn't Always Create More Freedom

Welcome to the Scale Your Insurance Agency Podcast. This podcast will give you all of the tools to scale your insurance agency and live life on your own terms. Wherever you are today, if you're stuck or well on your way to the success you desire with the right people, processes, and promotions in place, you will be unstoppable. And now I'd like to introduce your host, Mike Stromso.

Hey everybody, welcome back to the next episode of the Scale Your Insurance Agency podcast. My name is Mike Stromso. I'm your host, and I am grateful and thankful and excited to be with you today. We're going to keep doing deep dives on creating the insurance agency business of the future for you. Because, as you know, today's independent insurance agency industry is changing faster than ever. And so it's vitally, vitally important that we consistently be thinking about how we can redesign our agency so that it is positioned to scale and grow like never before. And that's my word. Redesign. Because the agencies that win in the future are going to be the agencies that choose to redesign and reposition themselves to grow and scale within today's market. And yes, it includes using technology and AI in the right way. And it's different for everybody, say on a custom basis. So let's get into it. So the independent insurance agency growth trap is what I want to talk about today. Yes, there's a trap when you get to a certain point. I realized that growth trap in my own agency, and I consistently run into growth traps with the independent insurance agency owners and leaders that we work with within UPP. And it comes a point when, because if you were a founding owner as an example, and back in the day, you did it all. You knew all the carriers, you had all the relationships, you wrote all the business, and you did everything. And you knew the processes, and everybody knew you, and you knew them. That's great. But there's going to come a point in your growth and scaling evolution where you just can't do that anymore. And that's where that growth trap exists. And in many ways, it's why revenue doesn't always create more freedom.

So let's talk about that.

Why? What do you mean revenue doesn't create freedom? Because when you get to a point, that growth trap, and if you want an easy identification piece, take your total gross revenue. And I'm not suggesting for a minute that gross revenue is the end all be all answer, but I just want to use it as a quick tool for you. Okay. Look at your total gross income or revenue for the agency divided by the number of full-time equivalent team members. Okay. So let's just do a quick example, quick working example. Let's say your total income is $1 million. Okay. So $1 million per year. And let's say you have 5.5 full-time employee equivalents. And so that includes the owner. So if the owner or owners are working in the agency, they count as a full-time employee as well. Okay. So if you have two part-time employees, that counts as one full-time equivalent. So if you have a million dollars in commission income and total agency revenue of a million dollars divided by 5.5 employees, let's say you have five full-time employees and one part-time, that's $181,000 in revenue, $181,818 to be exact. What $181,818 revenue per employee? So I would suggest that you're going to be at a point at that revenue level where you're out of time. You just don't have time to do any more because you're consumed by the business at that point. But that's good news. That's incredible opportunity. So I'm going to share with you a term that we have been using a lot lately inside our UPP circles. And it's called OKR. OKR, objectives and key results. And the thought process came by some of the best business minds, best business minds outside of our industry. And I haven't heard OKRs thrown around inside of our industry. So you heard it here first. Let's get to work with this. Because what OKRs are, they're objectives and key results. Objectives and key results. Because your goal to eliminate that growth trap and to make sure that you're working on the things that matter, to work on the things that matter, you've got to measure what matters. Let me say that again. To work on the things that matter, you've got to measure what matters. And so the OKR philosophy and operating environment does that for you. The objective is what meaningful improvement or result are we trying to achieve? That's in every operational endeavor within your agency for every desk within the agency. And then the KR is the key results. So you have the objectives, which is the O, and then the KR, which is the key results. What measurable outcomes by a specific deadline will prove we achieved the key result. What measurable outcome by a specific deadline will prove we achieved that key result. So let me give you an example that you can work with. Build an agency that grows profitably, and I would hope at 181 you're growing quite profitably. Build an agency that grows profitably without requiring more of the owner's time. And that's where we eliminate that growth trap. The key results would be more profit, more net profit, and more contribution to EBITDA, more productivity and efficiency, and less owner dependence. So the objective is to measure the outcomes, implementation automation as an activity. While reduce service time per account by 20% is a result. I know that that's not something that you're used to thinking about all the time, because as agents, we have a servant's heart. But it's important that we consistently put on our business hat, our business owner's hat, and start thinking about measuring what matters. Because when you start measuring what matters, and I'm going to give you some takeaways at the end of this podcast that you can implement right now, starting today in your agency, that will help you with this. Okay. So let me give you some quick hits. I've got five things that you're going to want to be thinking about measuring starting today. Because it is consistent, unfortunately, that many agents that I speak with or work with, even though they know it, they do not have their finger on the pulse of their numbers. They do not have their finger on the pulse of their numbers. It's vitally important that you do. So the first thing that you need to measure is revenue. How much the business earns before expenses. That's gross revenue, right? Next, gross profit. The revenue remaining after the expenses, and the classification depends on your accounting approach. Are you, is your PL, and do you know? I hope you know. Because I ran across an agency recently that did not know. In fact, their PL needs some work in the first place. Is your accounting approach accrual or cash basis? Look at your PL. Up in the top left, it should tell you. And if you don't know, contact your CPA and find out. Because it's critically important. That in combination with what kind of entity you are. All of these things matter. You need to know. So revenue, gross revenue, gross profit, and then your net profit. So the net profit is what remains after all recognized expenses, including overhead interest, and applicable taxes. So I know we're getting into the nitty-gritty here, but these are business principles that every agency owner and leader needs to be aware of. And then the net profit margin is the next measurable. So we have gross revenue, gross profit, net profit, and then the net profit margin. Net profit divided by revenue. So take your net profit, divide it by the revenue, and that's the percentage that you keep. That's your margin. And really, if you want to start getting into deeper conversations, we're talking about valuation here. We're talking about valuation, we're talking about strategy, your earnings, what you're able to take, and more. Because I remember my own agency, I got to the day where we became large enough, and my CPA said as a strategy, hey, we've gotten to the point where we need to position you to take dividends in addition to your base comp. So it's all strategy. Okay. And the last thing you need to be measuring is cash flow. Cash flow. So whether cash is actually available to fund operations and growth, because there's going to become a point, especially if you're growing quickly, this will become an issue. And depending when your fiscal year ends, I will suggest the majority of you, your fiscal year is coming up in just a couple of months. And I know all of you are tax planning. I'm sure you are, right? Your fiscal year is coming up. So that's something we need to start thinking about now. And we have agencies that we worked with over the years, and some have grown quickly: 20%, 30%, 40% per year, year over year. And while we're super happy for them, cash flow becomes an issue at that point. So these are things you need to be thinking about. See, a business can generate gross profit and still lose money on overhead. You must measure what matters and you must track profitability. Super, super important. So make sure, as part of your thought process of OKRs, objectives and objectives and key results that we're paying attention to and measuring what matters. Measure what matters. And also once you get into defining profit consistently, make sure that the compensation levels for the owners are reasonable and reflect the economic performance of the agency. Very, very important. What we're doing here is we're positioning the agency for healthy performance into the future. And when your agency is positioned for healthy performance into the future, that's a way in you can really grow and scale and you can remove yourself from the day-to-day operations. And that's when it gets really, really good. You see, building that foundation for healthy growth is intentional.

And so you must do and plan intentionally.

Sustainable growth that increases the business's earning power and cash generating capacity. What it does, it protects and preserves not only the health of the team, but it protects and preserves your ability, your ability to continue to grow and sustain while bringing on new p team members when necessary. Not all of the time.

But to get more efficient and better. It preserves it.

And it also builds the ability to operate beyond the owner. And it positions your team with the ability to use everything that's available to them in today's environment to his highest and best use.

So the five things that we talked about.

Let me dig a little bit deeper. We talked about revenue. We talked about profit. We talked about cash. We talked about capacity. Which ultimately leads to freedom. So the revenue. What I really want to position everybody to be thinking about when we're thinking about revenue, we need to make sure that it's quality revenue. And because we want to grow the revenue year over year, whether organically or through acquisitions, we want to make sure that it's quality revenue, it's smart revenue. We don't want to write a piece of business just to write a new piece of business. So the thinking is you've got to attract and convert more of your ideal clients. And that's where it's critically, critically important that your business plan is crystal clear about describing your ideal client. One, two, that your production team knows who that ideal client is, whether it be personal, commercial, or otherwise. And three, that you have ongoing training talking about who that ideal client is. And one of the things that we teach that I started doing many, many years ago was disqualifying. So the art of disqualification is critically important. That's how you maintain quality revenue. Quality revenue. And your goal, once you get out of the growth trap of you doing everything and you being responsible for doing everything, then you begin to lead your team. And you, this is something you need to teach STEM. And remember, you can't teach anything you don't know how to do yourself. And I'm sure you've already done it. Now we create systems and processes and build in accountability. We create that entire organization of how work gets done, how communication gets done, and how accountability happens within the business. That's part of the freedom that you will enjoy. So make sure you build all of that in as you start measuring what matters. So more quality revenue, more ideal clients, and can you historically predict the revenue year after year? Not considering premium lift. And right now, there's not a lot of premium lift going on. What's happening is going in the other direction. The markets have softened in many areas. And talking to agents, many agents are saying, man, I wish the hard market was here again. And I remember when the hard market was happening, they were complaining about the hard market. They said, oh, this hard market, we can't handle it, et cetera, et cetera. Now the soft market's here. Oh, the soft market, bring the hard market back. So the question is, what is it that you want? Most importantly, protect that revenue and make sure it's quality revenue. Take care of your customers. Care for your customers better than anyone else could ever care for your customers. And be proactive, never reactive. Quality revenue, number one. Number two, profit. You want to make sure that you are aware of your gross profit and your net profit and your net margins. And I know those might be new terms for you, but I want to at least introduce them here. As you start to grow, as you start to get bigger, as you start to get up in the multi-million dollar revenue realm, you need to be aware of these things. And I'm not suggesting that you're the one that needs to know how to do it, but you need to make sure that you partner with somebody who does understand this. And we've got people that we work with that do understand this. And they will coach you and teach you and work with you to make sure that your agency is financially healthy. Because a financially healthy business is a wonderful, incredible place to be. Quality revenue number one. Number two, profit. More profit dollars with a sustainable margin. It's intentionally designing your business to deliver that. And when you can prove that predictably over one year, two years, three years, or more, then the value of your business becomes even more. Vitally, vitally important. Next, cash. We talked about that. Enough cash to support hiring technology. If you have debt obligations, you need to be able to protect that as well. And then reinvestment in the business. All of it matters. And if you're in growth mode, you've got to have make that cash available where possible so that you can hire earlier. Because that would become vitally, vitally important. Because when you hire somebody, and trust me, we're right in the throes of this right now. We've hired two people in the last two weeks. Training, onboarding, and training, onboarding and training. It takes time. It will take one to three months to properly onboard and train somebody in your business. So you've got that gap as well. Okay? So you got to make sure that you predict your cash flow and you got to be aware of your historic cash flow as well. Next, capacity. What is the capacity of your team members? How do you know? Have you asked them? Have you talked to them about it? And I know you may be, may or may not be thinking, but oh, if I ask my team, what are they gonna say? Oh, we're so busy. That's great. Tell me about your results. And if you haven't heard me say that before, you may want to pause and write that one down. Every time you speak with your team members and they say, Oh, I'm so busy, get in the habit of saying, that's great. Tell me about your results. Because it's the results that matter. You want to become a results-driven organization that measures what matters. Try that one more time. You want to become a results-driven organization that measures what matters. Productivity improves when service and retention remains strong. And of course, sales as well. But it's intentional. It's proactivity versus reactivity, and you must be intentional. And you must be working your renewals in advance. And you must have a documented roadmap and a game plan. And the other add-on for this is client segmentation or tiering. Vitally, vitally, vitally important.

Because it gives you the ability on who you're going to serve first. And the fifth thing that you receive from all of this is freedom.

And one of the two people that we just hired was an executive assistant for myself. And the number one thing that I've received is mental freedom. Mental freedom. Leaders and systems carry more responsibilities, the business grows. And you need to position yourself as a leader, an owner, or a leader within the business to make sure that you consistently position yourself to have enough free time to lead your people. Because that's one of your number one responsibilities. The financial health of the agency and leading your people. And including, after leading your people, it's attracting, recruiting, interviewing, and hiring people and positioning your team to make sure that you have adequate coverage. But that's back to back to the financial health of the agency. Is the agency healthy enough to sustain bringing on another person right now? Or is it the right move to possibly position the agency to add a processor, which is a non-licensed person, you know, doing basic things that don't require a license? Or is it the right move to build in some type of AI or technology to do certain things? Because remember, when technology does the work of machines, people finally get to do the work of humans. A thought process for redesigning your agency. Healthy growth does not require the margin to improve every quarter. And I was talking about this a couple of minutes ago. Hiring ahead of the demand or investing in automation can temporarily reduce that requirement.

Meaning the improvement of the margin every quarter. Okay.

The investment should have a budget, should have a measurable expected return, and it should have a time frame for delivering results.

So understand from a predictability standpoint. And here's the takeaway for you.

As your agency grows, are you building more wealth, stronger operating capacity, and greater freedom?

Or simply creating more work.

Because our goal is that you create a business that supports the life of your dreams. But it's important that you design it the right way. And in today's fast-changing environment, it warrants consistent inspection of what you expect.

And it's important that you measure what matters.

I hope this has helped you in some way. And if you got great value out of this podcast, and I know this is new information for a lot of you. And you might be thinking, Mike, I've never thought about this stuff. I don't do that in my own business. Well, even more reason. I'm glad you showed up. And I hope this has helped you. And if you want to have a deeper discussion about it, please let us know. But if you got great value out of this podcast, please share it with somebody else that you know. Just have them go to Scale Your Insurance Agency Podcast.com and they can get access to the podcast so they can also have this information to use in their own agency business. Thanks so much for joining us today, and I'll see you on the next episode.

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