If You’re Not Growing, You’re Shrinking
This familiar euphemism has so much truth embedded in it. Like most robust age-old truisms, humans – and in particular, people in charge – will continually argue they are growing when they are not and/or argue such a truism does not apply.
A famous Italian author, Italo Calvino, in his novel Invisible Cities, wrote about the city of Thekla where construction never stops because if construction never stops, decay can never set in. (As an aside, given the pandemic and social isolation, I recommend at least considering reading another famous, but far older, Italian book dealing with these subjects relative to the plague: The Decameron by Giovanni Boccaccio written around 1400. It is a bit dense, at least the translation I read many years ago was, but it is applicable today and simply an enjoyable read.)
Growth is about improving your business but also about improving yourself. Failing to grow personally is so much more difficult to hide than failing to grow one’s business.
Accountants, rule makers and executives have found ways to hide, even convince themselves, that their businesses (or for regulators – the businesses they regulate) are growing when they are not.
To grow yourself, personally, you must be honest with yourself first. Otherwise, the starting point is a fictional land with no place to attach the tape measure.
If one is an executive wanting to grow their business, then one must be honest with one’s self and insist upon a true assessment of where the business is today. Atomize all the consultant speak and clarity eroding euphemisms along with the MBA creative accounting metrics. Boil it down to the basics and reality. Then insist only on metrics that are real, measurable and provable. In other words, quit using the means and methods you might use to sell someone on how great your business is doing. View it from the perspective of a hardnosed investor investing every penny, including mortgaging their children’s futures, or as a regulator who feels every finding has to be exact. Start there.
Measure Growth
Some examples to eliminate or at least modify include measuring growth correctly. Top line growth often camouflages the underlying reality. Rates can increase much faster than actual sales. In a strong economy, exposure growth suggests an agency or carrier is growing quite successfully when they are actually losing clients. The clients they keep have businesses that are booming, thus causing premiums to increase quickly. You’ll often see these specific examples in oil booms and busts, and in construction.
Whether you are a carrier or an agency, the true measure of successful growth, and therefore not decay, is the growth in the number of accounts, sometimes policies, that meet your quality criteria. This growth also requires the accurate measure of how many accounts were lost and separating out rewrites. At the agency and broker level, I find few have quality data, so how does one know whether they are growing or in some state of decay?
The large publicly traded brokers separate acquisitions from regular growth, which helps determine whether their existing books are growing with rates, exposures and actual sales combined. At least the acquisitions are excluded at that level. Working backwards then by subtracting rate increases and exposure increases based on GDP, it appears that overall, their organic books are in some state of decay (in total, though maybe not individually).
Although no one wants to say this publicly, a number of serial acquirers’ models are based on wasting asset acquisition, and therefore being in a state of decay is possibly not the problem it might seem. The catch is when an executive of a serial acquirer forgets they have a wasting asset acquisition model and thinks that somehow, after cutting expenses and thus significantly reducing customer experiences, they will still achieve true organic growth. They’ll probably be retired before the check comes due.
Training and Preparation
As any athlete who practices and prepares maybe 10 hours for every hour on the field in competition will tell you, focusing on growing one’s self requires commitment and dedication. Once a person is in their professional career, at least for insurance, it seems like the ratio of training and preparation per hour is about 0.1, at best. Six minutes of training and preparation is not much.
CE requirements are around eight hours per year, so if CE classes are the only training obtained, that equals 15 seconds per hour throughout the year. Fifteen minutes might save 15% on premium, but 15 seconds of training does not count toward the meaningful construction of your career. How much training and/or preparation time is required? Obviously, a sliding scale is involved, but I have found through teaching my proprietary detailed coverage classes that a more reasonable estimate is a minimum of one minute of training or preparation per hour, or two hours every three weeks. Can you at least manage one minute per hour to create your personal knowledge path? I’d suggest two minutes per hour is even better. Can you do two minutes per hour of real (not mostly CE) education and preparation?
‘When you are running a business, what is the ultimate definition of why you are in business and how you measure whether you are growing or decaying?’
Profit
Profit is another measure with which honesty is required, and this measure is gaining importance with more and more synthetic measures being created. If you remember the decay in the mortgage industry, prior to the credit crisis that had considerable lipstick applied to it that many an executive wanted to kiss, they were using synthetic measures of value and security. Today, EBITDA is used along with about six derivatives of this measure.
To begin, I find many users have no idea how to truly use EBITDA. They may be able, though not always in my experience, to say that EBITDA equals, “earnings before interest, taxes, depreciation, and amortization,” but often can’t advise as to what is the definition of “earnings.” I see many different definitions used, and the definition chosen often makes a huge difference in the resulting EBITDA.
In order to grow, first determine if EBITDA is even applicable. The SEC has warned that often it is not applicable. If it is applicable, then everyone within your organization should be educated on the definition and math relative to the definition of “earnings” as used in the EBITDA calculation. As many analysts have advised, EBITDA is often used to convince people to buy or sell assets, equity or invest or loan to an enterprise. It is used because the number looks much better than actual earnings (whatever definition is being used in that instance).
When you are running a business, what is the ultimate definition of why you are in business and how you measure whether you are growing or decaying? Are you building a business that is sustainable and designed to bring value to your clients or are you building a business to sell?
I think it is fairly safe to state that based on private equity’s record, many private equity players are simply in it to make money one way or the other. The financial structure used often speaks for itself. I am not condemning this perspective, simply attempting to help you see the difference. It is kind of like the famous songwriter Guy Clark’s message to a young man who ultimately became famous, too. “You can be a pop star or a serious artist, but not both. Neither is better than the other. But one must choose one or the other.”
If you are constantly constructing and building value for your clients and employees and all of the families involved, your metrics for determining whether you are truly building or growing will be different from the metrics used by those who only want to make money. Do not make the mistake of using the same metrics. Even metrics like revenue per person are not compatible between these two camps.
Are you growing, and are the measures you use accurately guiding you to the value to which you are building?
Burand is the founder and owner of Burand & Associates LLC based in Pueblo, Colo. Phone: 719-485-3868. E-mail: chris@burand-associates.com.