Agency evolution: today's bigger agencies face an array of challenges ranging from cost to recruitment.

During the past seven years, consistent merger and acquisition activity and the emergence of powerful sales organizations have created fewer, but bigger agencies. In 1997, only 3% of agencies were over $2 million in revenues, while today 11% are in that category. To be counted in the top 100 today, agency revenues must be more than $20 million. Seven years ago, $10 million would have assured a place on the list.

Some challenges facing large agencies today are:

* Growing Organically. There is no end in sight to buyers--in fact, most agents will say they are potential buyers. As a result, much growth that has occurred during the last several years is from acquisition. Organizations growing at 15%, for example, are realizing only 5% from organic growth and the remainder from acquisitions and rate increases. Although there are some very strong sales organizations with impressive new business numbers, strong organic growth is not the norm, but improvement is being made.

To improve organic growth results, many agencies are hiring at least one new salesperson a year, some as many as five or six per year. Agencies that experience the highest organic growth require their producers to put detail behind their sales goals, prepare pipeline reports and attend sales meetings. Producers are expected to meet specific goals for new business and have incentives for achieving high performance. Their activities are monitored. Those who cannot meet their goals are coached and monitored more closely. In these agencies, sales accountability is just as important as accountability of the service staff.

* Managing Compensation Costs. The cost of employees is an agency's largest expense item. Much progress has been made in revising producer compensation plans and paying differently for various sized accounts and lines of business. Average salaries of service employees have increased significantly as demand for these positions has increased. And there is often little difference in compensation from a high-performing service person to a less-productive person.

Most large agencies no longer pay producers on small accounts, either using carrier service centers to write and service small accounts or leaving them for small and midsize agencies to handle. Many agencies have revised commission percentages to offset costs of sales support, such as marketing and claims management. To address the need to pay higher compensation to service staff, agencies are developing bonus plans that tie these rewards to individual goals and agency results. Top service staff in these firms earn more money than their peers and do so by contributing to agency results.

* Working Efficiently. Despite robust capabilities of agency management systems, the productivity benefits they promise have not been realized. Duplicate filing systems continue to exist in most agencies, and many producers still resist automation. Until they agree to use the agency management system, it will be difficult for automation to be implemented fully.

In top-performing firms, producers can no longer opt out of using automation or following procedures. Great improvements in productivity are being made with imaging technology, and agencies are actually going paperless. One of the most inefficient processes in an agency is the submission process. Time is wasted when producers do not have qualified leads, cannot close the sale, do not have a market for their prospect, or are lax in gathering information for the submission. Addressing this requires good sales management and clear marketing procedures, accompanied by automation tools to produce submissions.

* Hiring People. Recruiting talent continues to be not only a challenge, but a crisis. Not enough new producers are entering the agency system to transition customers to the next generation. The shortage of agency customer-service representatives has increased wages to the extent that compensation often fails to correspond to the value CSRs bring.

Increasingly, agencies are looking outside the industry for aggressive salespeople, managers and service people. They find it's usually easier to train a salesperson in insurance than to train an insurance person to sell. Hiring proven managers from other industries brings skills and knowledge that can enhance the technical knowledge insurance people have. And hiring non-insurance talent for service positions requires training, but can bring employees who have automation skills or a willingness to work more productively.

With property/casualty rates declining, there's a strong need to add new customers to offset loss of revenue. But equally important is the need to manage compensation costs with improved employee productivity and better use of automation. Agencies that have invested in people, technology and performance-management during the hard market are best positioned to produce growth and profit.

Sharon Cunningham, a Best's Review columnist, is president of Business Management Group, a management consulting firm based in Hartford, Conn. She can be reached at [e-mail].