The Value of a Great Producer

Hardly a day goes by without the industry press covering an employee lawsuit, usually involving a salesperson, where a competitor has poached key people. “Poaching” typically means that the new employer enticed the employee(s) to leave in violation of the employee’s contract. Sometimes the suit involves entire teams. One recent headline described how one broker poached 140 employees at one time from another broker! That would hurt!

Often, the new employer is sued along with the employees. The suits usually involve allegations of violations of confidentiality clauses and trade secrets. The real issue is the loss of revenue because clients often move with the employees, depending on the details and the consumers’ attachments to the team.

There are so many of these lawsuits, and the dollars are so significant, that if the suits were all combined, we might have a micro economy. We already have a niche business development industry where specific entities have determined they can achieve a better return on investment by attracting producers and sometimes teams to come to them, hopefully with their clients and new business capacity to pay for the inevitable lawsuits, rather than developing their own production capacity. They may be especially sensitive to developing their own production capacity knowing how they poach people, which causes the current employers to lose their development investment.

The cost of developing new production ability is exceptionally high, which is also driving the high prices in agency acquisitions. It is really frustrating to pay sky high prices and then see what you just bought get poached. But the poachers figure it is cheaper to poach than to buy or develop.

Carriers are also focused on production development. Their terminology is a little different. They call it new business acquisition cost. A few carriers focused on narrow lines have greatly decreased their new business acquisition costs, which is upsetting the market. Consider that the less money that is required to acquire new business, the less effort that is needed to maintain high retention.

Whether at the broker/agency level or carrier level then, new business development costs have become the king, queen, and bishop of success. Yet, I don’t think most insurance entities even understand how these economics have entirely changed the game being played.

How much does it cost to develop a producer? The lowest starting price for a producer with true, but hidden, potential is likely $60,000 for a 23-year-old. Finding these people takes some work, but it can happen. It’s like finding a diamond in the rough when no one else is looking. This can occur for many reasons, including the educational environment, choosing the wrong major, and lacking self-awareness of one’s sales potential. If they have great self-awareness of their abilities, potential employers are likely to be aware as well, and the price goes way up. Starting salaries for high-quality people in sales can be $100,000 with no experience.

A 23-year-old, or even a 30-year-old, is unlikely to become a profitable investment in less than three years and is more likely to require at least five years. They are like de facto machines from an investment perspective. The machine cost $X. The widget the machine makes is wobbly at first, requiring lots more tooling. After three years, the machine produces widgets that are not wobbly, and sales begin to increase. The machine costs $70,000 times three years, plus training, benefits, and other people’s time. The total cost is at least $300,000.

But humans are not machines. The success rate, defined as a salesperson generating a positive ROI by year five without consideration of asset value, is maybe 20%. This means four $300,000 failures for each success. If the goal is for the producer to generate a minimum of $500,000, then roughly $1.5 million is spent for each success, which is three times the successful producer’s book value.

Therefore, maybe paying three times for an agency is a smart move. And if you are a private equity firm or publicly traded broker, accounting rules allow a buyer not to report the full cost of an acquisition on its income statement. In fact, not even 50% needs to be shown on the income statement, so a three times revenue acquisition looks like only 1.5 times. And if a buyer uses non-GAAP measures such as EBITDA, acquisitions are 100% free. From these financial engineering accounting loopholes, a firm looks far more profitable by buying business than developing producers.

Going back to the poaching suit, poachers often budget $500,000 as a starting point for the legal bill they will incur for a lawsuit accusing them of taking employees. They are paying significant bonuses for those people to leave their employers, too, so they’re spending a lot of money to poach employees. Using a $1 million book for simplicity, and they are paying $500,000 in legal fees and another $1 million in damages to settle the suit and employee bonuses, the math works in their favor.

So what is an agency to do that does not want to poach producers or buy agencies at three times revenue, but still grow? The investment in new people must decrease significantly. The key is increasing the percentage of producers that succeed. Over time, I’ve built an infrastructure that includes all the required coaches (anyone who claims to be the only coach, even the primary coach, a new producer needs should be ignored). Within this infrastructure, the success rate is about 70% and the cost of the failures is approximately 67% less.

One other step required, which costs money, is investing in the highest quality employment contracts possible. Do not hire the local, jack-of-all-trades attorney to write these contracts. You need true experts to keep your successful producers from being poached. And if they are poached, you need a contract that keeps them from stealing your accounts and taking other employees with them. Do not pay attention to the issues around non-competes. What you need (I’m not an attorney, so don’t take this as legal advice) is a very high-quality trade secret agreement.

Grow producers economically and pay whatever the price is for high-quality contracts, and you will have the foundation for beating the big guys.

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NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.

None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.