For many agency owners, cross-selling is a missed opportunity – Part 1
At this point in the industry cycle, it’s a great time to get creative. The growing concern about the long-term viability of the contingents following the deal between Marsh and the New York Attorney General’s office is arguably the most high-profile concern. In addition to this problem, there are also many market factors involved. Rate cutting persists across many product lines, with no immediate end in sight. Increased competition continues, particularly for mid-market customers, and consumer confidence is falling.
look at the horizon
In many cases, agency owners choose to stick with their niches, which is certainly a viable strategy in good times. But when faced with stiff competition and product slippage, consider horizontal product and service sales opportunities.
Most mid-market P/C deals provide a predictable set of products to their clients. So it’s hard to differentiate between your business and another down the road. Customers are becoming more transient and more sophisticated when it comes to solving risk problems. Today’s clients require more insurance options and coverage than many agencies have to offer. This is especially true in the case of a business 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, the pitfalls, and what to expect in market response.
Here’s a hypothetical situation: a business client wants to provide long-term care for employees or a more comprehensive policy for executive management. Or maybe they’d smile at the additional executive team benefits offered by a disability income program.
Beyond the benefits, many executives could benefit from a suite 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 offering to design a full executive benefits program. Don’t worry if the skills aren’t available internally yet.
Think about the rest of the employees of the client’s company. They certainly buy personal lines coverage for their home, auto, or life insurance needs. Is this something you can provide? What about group benefits insurance?
If the client is interested in alternative risk financing, offer to be a liaison for third-party administrator services for the client’s self-insurance programs. How about offering access to captives and group risk retention solutions?
How to get there?
When considering how to offer new products and services, many agency executives see a steep learning curve and even higher capital investment. That comes from the field “I need to acquire a company with these skills, or hire someone who does.” There is a better way.
Often the best solution is to enter into a joint venture with two or three other companies that share the same geographic footprint but have disparate core product specialties. Compare this route with the other two options: buy or hire.
An acquisition could be an attractive option for some. Since the cost of capital is low, many business owners see it as a way to build a more diverse business. But this route could actually be more expensive, because it definitely presents a higher financial 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 ensures that the investment in the relationship will not be in vain. It may not be romantic, but in many cases it will lead to greater immediate financial returns and less stress about the potential success of an acquisition.
Perhaps hiring new staff seems like the best route. But there is a speed to market issue. Even the most successful growers often need two or three years to establish relationships and get systems up and running. Consider that the wrong specialist may be hired initially, and the company must bear the expense of going back to the drawing board. Also consider that new products and services will have administrative technical requirements, and entering a new market is time consuming and costly.
Creating a unified front
Joint ventures are contractual relationships between multiple parties that typically operate under a common, fictitious, brand name. Relationships are highly customizable, addressing each company’s ownership, operations, revenue, and risk-sharing issues. Such a deal, if properly structured, is paying dividends to companies across the industry every day.
One way to structure it is through a contractual reference agreement, which does not create an actual joint venture. In this situation, customers will perceive that they are receiving service from two separate entities and may suspect that “referral fees” add 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 customers feel they are receiving a complete, undiluted package. In addition to working together under the joint venture name, each partner may also retain their own ownership and operating structures.
Strategically, the best option is to aggregate core product skills across multiple companies and funnel all those products and services into the new rebranded entity. This minimizes shareholder risk and improves the reciprocal cross-sell exchange between two or three companies. It adds economic value to each company as they can reduce their customer acquisition costs through the relationship. And it creates higher customer 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.