Canadian Underwriter
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Peripatetic Rep: Cost-Cutting Blues


October 1, 2001   by Axiom


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The inviting smell of cooking hamburgers wafted in the warm sunny air as I walked across the park. A dozen large barbecues were lined up side-by-side, each with a smother of patties sizzling away. Off to another side there was a giant drum filled with cobs of corn gently bubbling in boiling water. A large crowd of townspeople were already lined up, paper plates at the ready.

It was the annual fall barbecue and corn roast staged in broker Stan’s hometown of 30,000. The event was a fund-raiser for the local hospital, and as my company’s senior marketing representative it was my pleasure to attend, to take along a small corporate cheque in support of the hospital, and to visit with Stan. I found him unloading a fresh stack of paper serviettes from a box. “Hi, Dave,” he said cheerfully. “Grab an armful of these and stick ’em on that table over there.” That chore complete, we lined up to collect our plate of food, then made our way over to one of the picnic tables set under the trees. Already seated there were my good friends Bob Davies, a successful midtown broker in the city, and Joanne, co-partner in a suburban brokerage.

“Stan, I look forward to this barbecue every year,” Joanne said, laying tomato rings on her hamburger. “But tell me something. Didn’t you serve strip steaks and back ribs in the past?” Stan smiled at her, “you’re absolutely right. But costs caught up with us. We had to settle for hamburgers this year.” He shrugged. “Just like the insurance business. When the market turns and things tighten up, we have to do some cost-cutting here and there.”

Bob Davies nodded. “True enough. Right now it’s the companies who seem to be at the receiving end of the bad results, but we all know that it won’t be long before brokers are affected too. Companies will probably start trimming their broker force, commissions may be cut back, underwriting will get tougher…”

“Not much doubt about that!” Stan said forcefully. “I think most of the brokers we all know would agree that over the past few years margins have been getting tougher and tougher to maintain. We’re all aware that the companies are trying to redefine the commission structure, especially in this electronic age of ours.” I responded, “that’s all part of our brave new business world. But, right at this moment, the companies’ poor operating results eventually affect everyone in the business. We’ve all gone through these periods. Tell me, how do you go about cutting back your operating costs when you can see the storm warnings all over the industry?”

“Well, Dave…”, it was Joanne speaking. “If there’s one thing I’ve learned about cost-cutting, it’s this. You can’t just walk in one week, grit your teeth and chop your entire expenses by half, by a third, or whatever. In my experience, that’s the sure way to do it wrong. You need to sit down with your accountant and your senior person, review all the figures and facts, then take some action.”

Bob set down his can of soda. “When you start looking for ways to cut costs, you have to have a yardstick – something to measure yourself against. For my money, you should start by taking a long hard look at how your competitors are doing. Our brokers’ association produces a first-rate ‘agency costs study’ every couple of years. I always check to see how my costs stack up against the averages of other offices with the same volume of business as me.” Joanne was nodding her head, “I look forward to the study being published. If I look over it and see that the average ‘occupancy costs’ for offices my size is 5% of total operating, and I’m somewhere around 7-8%, then I’m obviously out of line and I’ve gotta do something about it.”

Stan put down his hamburger and tapped the picnic table for emphasis. “Damn right!” he said, looking at Joanne. “Last time I checked out the association’s cost study I was surprised to see how high my telephone and long distance costs were in comparison to the average for brokers of my size. My office manager and I began to dig a little deeper. We found that we could save substantial money by switching from our existing phone service provider to another provider. We had simply got a little too comfy with the old program we’d had in place for years. We’d overlooked the cost savings available in new programs being offered by those aggressive newcomers in the field.”

We ate in silence for half a minute, then I threw out another question. “What about those easy cost savings, you know, items like advertising and promotion, or entertainment? Surely chopping back these is pretty straightforward?” It was Stan who answered first. “Well, Dave…they are, and they aren’t. Take advertising for example. When you live in a small community like me, it’s no easy matter to suddenly stop advertising and promotion. Some of our advertising falls into the category of support for the community as a whole, adding our name in support of the hospital expansion, to the local Rotary or Lions Club festival, to the Chamber of Commerce. In a small town these people depend on the support of local business, and you count on them as customers.”

“Are you saying it’s a budget untouchable?” Joanne queried. Stan shook his head. “No, I don’t think it’s a good idea to consider anything within a budget untouchable. In our situation we just decided to add a marketing edge to our ‘corporate support’ advertising. Instead of just running our name under the ‘compliments of’ banner, we created a ‘tip of the month’ advertising campaign. It gives simple, sensible advice to consumers on insurance matters. So although it’s not money saved, it is definitely money better spent.”

Joanne waved her hand. “Hey, that’s good. I like that.” Then she sighed. “You know the last time my partner and I went through this cost-cutting exercise, we trimmed back on lunches, we got rid of one staff car, and we pared down our promo budget – but these items are not really very big tickets in your overall operating costs. You really have to look at the big dollar categories.”

“Like staff salaries and bonuses?” I asked. “Yup,” she replied. “Half your operating cost is the salary line.” She gave us a rueful smile. “A few years ago when we were struggling a bit, we took a hard look at our salary line. We found we were at the high end, so we had to trim back. We decided not to lay anyone off. That’s how you wind up losing people – and I think we have good ones. Instead, we cut back the work week of two hourly-rated people. We moved another person, a working mother, from full time to halftime, something she was more than happy to do. And we adjusted our staff bonus arrangement.” Stan asked, “in what way, Joanne?” She turned to him, “well, my partner and I tie our staff bonuses to our contingent profit commission. Each of our staff gets a percentage of bonus based on our CPC cheques. During that tough time, we had to notch back that percentage.”

At this point there was a grunt from Bob Davies. “All this stuff is true,” he said. “But you know what’s really sad?”, he asked looking around at us. “It’s this…a lot of brokers out there don’t really have a firm grip on what their true operating costs are, especially as they relate to the cost of acquiring business, and processing it.” He pushed his empty plate across the table. “Just the other day I heard of a broker in the city, quite near to me, who brought a new producer into his office. He not only agreed to give this new producer 50% of the commissions from year one onward, he also promised him full ownership of all the new business he brings in. Plus…”, he held up a cautionary finger to emphasize his point, “this broker is going to pick up the full cost of the CSR who’ll be working on this new producer’s business, as well as cost of the producer’s office space and phone service”. He shook his head disbelievingly. Stan whistled slowly through his teeth. “It’s a sweetheart deal all right,” he said with a laugh, “for that producer. I certainly wouldn’t offer anyone an arrangement that rich.”

“What sort of deal would you cut?” I questioned. “One that’s pretty common I would guess,” Stan replied. “I
give the producer 70% of the first year’s commission, then 30% in every renewal year. If I lose money on the deal in year one, then I’ll make it up in succeeding years. And of course, I retain ownership of the business.”

“And I guess you expect producers to pay their fair share of office space and operating costs?” Bob Davies interjected. “Absolutely!” Stan responded. “They can share the time of one of my CSRs, but I expect my producers to do their own account servicing.” I finished off my hamburger and sat back. “You know, although this discussion is about cost-cutting, we also seem to be talking a lot about cost-saving.”

“Yes, we are, Dave,” Bob Davies said with a smile. “Truth is, they’re kissing cousins with one important difference: any dolt can chop expenses just by stopping doing certain things like buying new equipment. But the other side of the coin is making your operating dollar go further by being more imaginative, more effective, more efficient. That’s cost saving and it’s a different cat. For one thing, cost savings are usually achieved after you’ve studied a problem and found a better way of solving it.”

“Hey! I can give you a great example!” Joanne said with a laugh. “It involves a different business, but it proves a point. A couple of weeks ago I flew out west and I used one of those new discount airlines. It was clean, comfy and on time, and no tickets were issued. I asked their passenger service rep about that, and he said they figured they would spend about six dollars to buy and print each individual three-part ticket, using that special carbonless paper. Well, when you fly half-a-million people a year, you can save a cool three million dollars by cutting out printed tickets. Pretty good cost-saver.”

That brought a grunt from Bob Davies. “Good story, Joanne. And there’s a bit of a parallel in our business, with direct bill.” He spread his hands in front of him. “Believe it or not, there are still lots of brokers who still resist the direct bill option, and I still hear those same, tired old arguments they use to support agency billing. They claim they can make eight, or nine or ten thousand dollars of extra income a year from the interest that customer payment cheques generate in their trust account. Problem is, they never deduct the cost of handling the business themselves. And the reason they don’t deduct these costs?” He raised his eyebrows questioningly. “Because they don’t really know how much it costs them to collect the premium, to carry customers, to pay postage, to pay staff to manage the accounts receivables – and let’s not forget the added cost of those inevitable write-offs.” Bob raise his hands appealingly in front of him to make his final point. “And after all, aren’t a lot of brokers kidding themselves when they believe that sending out a bill is really what customers perceive as service?” He shrugged his shoulders. “Let’s face it, we just can’t compete with the variety of payment options that direct bill offers.”

“Yeah, I think they’re kidding themselves,” Joanne agreed. “I’ve switched almost all my business to direct bill, except my VIP accounts.” “Those being your large commercial clients who like the personal touch from you?” I queried, and got a nod from Joanne. “Yes, what I call my VIP accounts like to know that I’m personally involved in looking after their interests,” she said. “And with the revenue they generate for our office, I’m happy to oblige.” She gave us a quick smile. “I’m not about to cut costs there.”

At this point Stan glanced down at his watch. “Guess what?” he asked, smiling at us. “The fund-raising barbecue and corn roast is now officially over, and it’s time for the grand finale of the afternoon. There’s a baseball game between our local all-stars and a top team from the city.” As we rose from the picnic table he cleared his throat and coughed gently. “However, there’s one little task that has to be done first, and I know you’ll all be delighted to help me out.” We stood still and waited for the other shoe to drop. Stan pointed to the piles of paper plates and pop cans lying around the nearby tables. “We’re cost-cutting this year, folks. We decided to go for a volunteer clean-up crew this year…and you guys are it.”


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