The Art And Science Of Growing A Life Insurance Distribution FirmPart 3

In this third and last article in this series, I hope to take the growth planning process further and to bring this long "detour" to a point where an entrepreneur can take action.

As I outlined in my first two articles (see NU, June 11 and Oct. 8, 2001), beginning a growth initiative before you are the low cost operator, before you are a leader in your region or market niche, before you have discovered the area of your passion and primary skill set, before you have convinced yourself, your key staff and your banker or aggregator that you have the resolve to grow, and before you have brainstormed all possible growth initiatives and put the "short list, through a screen of economic potential and capability gaps, will do more damage than good to your business. You have to earn the right to grow.

Taking small steps

Where to begin? A growth strategy at its most basic is a series of integrated steps that will help life insurance entrepreneurs beat their competitors and reach their personal and financial goals.

These action steps often lead into unfamiliar territory. There is market uncertainty, financial and personal risk and multiple and often mutually-exclusive paths. Your staff will have to develop new capabilities and other functions may have to be dropped or outsourced. You will have to develop new capabilities and have to let go of some of the behaviors and selling models that have worked in the past.

Pursuing one idea often means ignoring or postponing other opportunities. You and your aggregator organization may have a different agenda or you may be hamstrung by staying independent but still having to create a unified customer experience over diverse geographies and through different customer groups with different service expectations.

Market uncertainty, lack of accurate and complete information, and personal and organizational capability gaps call for a more measured pace of smaller, iterative steps instead of bold leaps. Discovering and following your "bliss" and/or your unique capability is a great start to the process. But the survivors in most industries grow their business through a series of linked, small, iterative, probing steps, not through immediately "betting the farm" in an all-or-nothing, "take no prisoners" assault on a strongly felt but vague and poorly-thought-out personal vision.

The goal of the "three horizon process" is to make money with each measured, small step, keep score, get real-time market feedback, learn, look around for new opportunities, refine your plan and business model based on what you have learned, then take the next small step.

With each step you and your staff build more skills and are better prepared to move to the next level. Your field of vision increases and your competitive position improves. With each step you refine your goals and your plan is based on what you have learned in the market. New opportunities often surface that werent visible when you began the first, small steps. You also preserve flexibility for great but serendipitous opportunities.

The "art and science" is to find a profitable growth pace that balances the vital sense of urgency with the need for flexibility and the time to build the skills of your key staff necessary to carve out a sustainable, defensible and profitable niche. Move too slowly and someone beats you to the opportunity. Move too quickly and your organization could implode.

Looking at the great new business growers like Disney, Gillette, and Johnson and Johnson, a common pattern or process of business growing (or moving a horizon three opportunity into a horizon two and then into a horizon one growth business) becomes visible that mirrors the process Ive outlined here.

First, these firms take an option or establish a "beachhead" in a business or niche with a tiny acquisition or internal experiment. Next, they follow up this small investment by actively testing and refining the idea and developing the business model to make it commercially viable.

This step often requires additional investment, resource allocation, improved performance metrics and a much better sense of the potential of the business.

Once their business model is refined and has proven commercially viable, they aggressively replicate and extend this model to dominate their chosen line of business or market niche. This third step calls for additional investment to both grow the business and to defend it from the new competitors that will inevitably spring up to get a piece of this new opportunity.

The fourth step is to manage this business for maximum current profitability before the "s" curve starts to flatten and trend down.

The great strength of these organizations is having the next set of products and/or businesses ready when they are needed and in protecting these emerging businesses from the strict management and administrative requirements imposed on "horizon one" growth engines.

The life insurance entrepreneur has to replicate this process, but on a smaller scale and without the resources of the large organizations. By taking small measured steps into new product/service areas and reflectively and openly refining the emerging business model based on "real time" marketplace feedback, his or her organization is learning and developing new capabilities to take the business to the next level.

An example of this procedure could be in the executive benefit business. For the past few years, this has been a very high-margin business for experts in this field. And, given todays demographics and the onerous regulations of 401(k) plans, this business appears very lucrative. The life insurance product that funds these non-qualified plans still pays a high commission and the service requirements, although they are rising, are still not at the level of the 401(k) market.

Demand exceeds supply and competent firms in this field are doing very well. However, if the "s" curve phenomena appears in this line of business, soon mutual fund companies and other competitors will enter the business with new business models based on new products. They will "steal" customers and put great pressure on existing margins and business systems. Some of todays leaders in this niche will be caught off-guard, have high cost structures and inflexible organizations and will be destroyed.

The trick of the "three horizon" planning method is to be managing todays executive benefit business for this natural progression of the "s" curve, milking todays high margins and be anticipating these new products and competitors by placing small bets in newer arenas.

Another example could be the rise, then transformation, of the "pension max" market niche into the "annuity max" market niche. In the 1980s many state, city and union defined benefit pensions featured very few retirement options. Retirees could choose a series of payments for their life, perhaps a joint life payout with their spouse and a lump sum option.

At the time, a whole life or a universal life insurance policy often provided a better option for the retiree. Some life insurance entrepreneurs entered this niche and slowly, on a step-by-step basis, developed marketing plans that included ads, seminars, hiring ambitious retires as sales reps, creating warm lead systems, custom illustrations that mirrored the particular pension system and a recruiting system to provide new sales reps.

However, with the rise of the 401(k) pension system, the payout options of these defined benefit plans improved: more options were available and payouts were better. Or, in other words, the margins in the "pension max" business were reduced by competitive actions. Some of these early "pension max" entrepreneurs migrated to a new niche–"annuity max."

This market niche is not the pre-retiree, but retirees who are almost 70 and realize that they consider their annuity more of a gift to the next generation than retirement income. This niche is more complicated in that it often requires alliances with banks and wirehouses where annuities and IRAs are housed. It requires new marketing skills: illustrations, products focused on this market, brochures, sales models, recruiting systems, training systems and compensation packages that must all be field tested and refined.

Building organizational capabilities

Organizational capability building is so important because once a first-mover gets a little traction and makes a few sales, new competitors will quickly enter the scene. These new competitors will tear apart the business model and mimic what appears to be the key factors for success and will attempt to match your organizational competencies. They will charge lower prices and will offer faster service.

Life insurance entrepreneurs who "win" will be those who are able to create organizations with a strongest, most relevant and most sustainable "bundle" of capabilities that are exhibited in the day-to-day battles in the hand-to-hand combat in the trenches. He or she who has the best staff wins.

Key managerial questions to ask will be which capabilities will be the key drivers for success in this market niche; which business functions should you keep "in house" and which functions to outsource to specialist organizations; which capabilities are best housed in "the field" at the point of sale and which should be centralized in a home office to exploit the economies of scale and scope; and which bundle of capabilities will create a competitive advantage and which are simple "table stakes" necessary to play the game; how do you discover which staff activities are the key drivers to your success; how do you measure the success of these activities and how do your reward and encourage your key staff to master them?

In a business like life insurance that is so heavily dependent on distribution efficiency and effectiveness and the blocking and tackling of old fashioned salesforce management and productivity, its vital to look at organization capabilities in a broader sense than the usual notion of operational competencies. Operational competencies are important, but in themselves, they dont make sales, they dont develop relationships, they dont get strong referrals and they dont build the trust necessary for repeat sales.

The efficient flow of new business and activity measurement is important, but not as important as the daily "blocking and tackling" of managing the sales cycle and in recruiting, developing, rewarding and retaining a great internal and external salesforce or broker network.

In the life insurance distribution business, sales capabilities, field efficiency and productivity have traditionally separated the winners from the rest of the pack. There is no evidence to indicate that this will change significantly except with the addition of strong marketing capabilities to enhance and better focus the sales organization.

Mike McKenna, Birmingham, Ala., helps firms build salesforce and channel management skills to create a sustainable advantage. He is a former McKinsey consultant and executive for a national holding company that purchased financial services distribution companies. He can be reached via e-mail at mjmckenna@earthlink.net

Reproduced from National Underwriter Life & Health/Financial Services Edition, April 1, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.