Eye on the prize: insurers can save money and boost revenue by improving distribution-channel management with the right strategy and efficient operations.

The past two years have been difficult for the insurance industry, with the combination of falling stock markets and interest rates leading to reduced consumer interest in several core products. With such pressure on the top and bottom lines, many insurers have focused energy on reducing costs. In working with our clients on such efforts, we were intrigued to find a significant, often overlooked area, for operational improvement: distribution channel management.

Carriers have spent considerable energy ensuring that they are operating at peak efficiency and effectiveness. Insurers often target service and information technology in this effort, given these areas' usual share of the cost base. But most companies have not studied the strategies and operations of their more creative or relationship-oriented functions, such as marketing and distribution. Focusing on distribution now will help carriers maximize results today, and best prepare them to take advantage of the inevitable market upswing.

Insurers often face the following issues when reviewing the efficiency of their distribution channels:

* No clear objective for a given channel. Are all carrier distribution channels worthy of the same capital and human resource commitments, or should some channels be grown while others are "harvested" or even exited?

* Undifferentiated value propositions to distribution partners. Distribution partners and producers, especially independents, have dramatically different needs based on their core business. Is a carrier offering largely the same products, services and support to partners regardless of channel? Are the carrier's offerings distinct from its competitors'?

* Lack of focus. Are wholesalers, sales managers, and relationship managers spending time and money building relationships with firms unlikely to generate significant revenue for the carrier?

Lack of focus is a particularly common problem. In one client example, the carrier's staff was trying to sustain relationships with several hundred distribution partners representing many thousands of producers. However, an analysis spanning four years of production showed that only one in 10 of these partners generated significant revenue for the carrier. The remainder produced on the order of 5% of revenue in total. Focusing efforts around higher-value firms not only reduces cost, but actually increases revenue from distributors with true market power by reallocating resources to them.

However, a strong distribution strategy is challenged from the outset if the people, processes, and technology are not in place to execute it effectively. Some key issues include the following:

* Opportunity to properly size and align wholesaling efforts. Does the carrier have sales plans that call for wholesalers and relationship managers to support revenue production that is either unrealistic or not aggressive enough? Are production targets set independent from territorial alignment and geographic dispersion of distribution partners?

* Lack of account planning. Does the carrier have deliberate plans for managing its most productive distribution relationships, including understanding of partner needs, decision makers, competitor position, senior contact plans, etc.?

* Need for further automation. Without enhanced automation and the data integration it enables, carriers find it difficult to effectively manage their distribution functions. Does the carrier have clear plans for technology connections with distribution partners that balance costs with value created? Are the differing connectivity needs of the different segments appropriately considered? Is an integrated suite of sales force automation, producer relationship management, and customer relationship management software available to manage distribution efforts within and across channels?

Enhanced automation is important to effectively manage distribution. Often we find that even when clients establish a distribution strategy, there is a large "management and information gap" between the strategy and resulting revenue plans. Our most effective clients measure both distribution activities and results. Account plans, sales force automation, and contact management systems--if integrated with management reporting--can show where front-line distribution activity is off-target.

A deliberate, fact-based review of distribution effectiveness and efficiency is overdue at many insurance carriers. While companies making the effort may see only minor cost reductions in the near term, we believe they will realize considerable top-line impact quickly, and should accelerate recovery and market share growth during a market upswing.

Gary Ahlquist is a senior vice president in the Chicago office of Booz Allen Hamilton. Gil Irwin and David Knott are vice presidents in Booz Allen's New York office. Paul Lockmiller is a principal in Booz Allen's New York office. They can be reached at [e-mail]