Monthly Archives: February 2015

The Demise of Small and Mid-sized Benefits Brokers is Greatly Exaggerated

There is the belief out in the benefits world that the small to mid-sized benefits brokers will either struggle to survive or not survive at all. With Obamacare, Private Exchanges, ACO’s, new competitive threats, it simply will be too difficult to change one’s business to succeed, or so some believe. I disagree. Not only do I disagree but sometimes the market changes in a way where small to mid-sized businesses may be better positioned for success.

Let’s start with the idea in general that small to mid-sized firms won’t survive. Why would this be the case in the benefits business but not in any other industry? There are small law firms, accountants, restaurants, hardware stores, and breweries. Heck, I am managing my in-laws independent pharmacy that continues to be profitable year in and year out. And my business bank is a local bank that has only one location. Sure, there are some industries like large manufacturing where the barrier to entry is real high such as the automobile business, energy, or aircraft manufacturing. But that is not the case with the benefits business. It is primarily a service industry and I have a hard time thinking of a many service type industries where all the small firms were displaced by the larger ones. I have seen both larger and smaller firms displaced by firms with newer technology, but let’s leave that for another article.

According to the census bureau there were 6, 634,155 businesses in the U.S. in 2010. Of those 3.8 million were firms with less than 10 employees, 10 – 99 had 1.3 million, 100-500 had 1.65 million, and for companies with 500+ employees there were 1.1 million firms. What these stats are saying is that the majority of employers are small to mid-sized businesses (less than 500 employees) therefore the majority of a benefits brokers customers and prospects are also small to mid-sized employers.

Small to mid-sized employers are proud of what they do. In fact, many believe they do whatever it is they do better than their larger competitors. If you were to ask the average small to mid-sized business owner how they are better they would say things like “we provide more personalized service”, or “we can adapt faster to client’s needs or market changes”, or “we are more vested because we own the business”. You see most businesses in general are more like the small to mid-sized broker than they are like the larger broker. Think of this for a second. If everyone did business with only the largest companies in any industry both you and your prospects or clients would be out of business. A small business owner may appreciate that perspective.

In some situations small to mid-sized firms have an advantage. A good example of this is how quickly firms have responded to the competitive threat of Zenefits. It is my experience that the mid-sized independent brokers have been able to respond faster than the larger ones. When Zenefits says we will “help you with payroll” many larger brokers say “we aren’t touching payroll”. While independent mid-sized brokers are making changes quickly to meet the demand larger firms are asking permission of their attorneys and compliance people. It doesn’t matter whether you are big or small we don’t get to make the rules of the game and sometimes the market will go in a direction that may make certain firms feel uncomfortable.

This article is not taking sides. Small and large businesses can be displaced. Whether you are big or small you need to provide something that is valued in the market. But, you don’t get to make all the rules. Big brokers can’t say, “We don’t want to do that”. Well they can but they won’t get the business. Smaller firms have to find ways to deliver what larger firms do or find other ways to differentiate themselves. And when you are talking to a small to mid-sized prospect ask them how they are different from their bigger competitors. When they say that they provide more personalized service, adapt faster to market changes, aren’t afraid to take chances, etc… just say, “well I’m just like you”.

Can Benefits Brokers Afford to Play Not to Lose?

I always considered myself an athlete though one can certainly make the case that putting an ex in front of athlete may be a more appropriate description today. As an athlete I always believed that it was the competition that made me better and the game better. Now as a business owner I still believe that it is also the competition that yields better results. As Mark Cuban says “If there is someone out there who can kick your butt by doing it better than it is your job as the owner to stay ahead of them.” That’s good advice.

The benefits brokerage business to date has not been faced with same competitive market forces other industries have had to endure. Typically, as markets mature and competitors enter, competitive pressure forces prices and often profit margins down. But not in the benefits business. Most markets have more than enough “broker capacity” (supply) to serve the markets yet the excess supply has not driven down fees. This is primarily due to the fact that most of the revenue received is via commission paid on a product (medical insurance) that for years has been growing at a rate much higher than inflation. With recurring revenue growing at medical inflation rates it is easier to grow a business. And in many cases the buyer has no idea what they are paying for the service.

This atypical market environment may have contributed to building a broker culture where many brokers are “playing not to lose” because growth could come from simply protecting one’s block of business. Much like the Packers in the last 5 minutes of their playoff game. They played not to drop or fumble the ball. They wanted to run out the clock. Not to over-generalize but most brokers are also playing it safe. Of course that is not you or I. That is the other guy.

Can a broker continue to play not to lose in this new benefits environment? With Obamacare threatening small group business; new competition from payroll, HR, and technology vendors; reducing commissions due to a move to higher deductible and self-funded plans; and expanded fee for service business; many brokers (not all) including the national firms admit they are now struggling with organic growth. The world is different. It is not business as usual.

Not only has this environment created a play not to lose culture but I think it may have impeded creativity and innovation. Peter Thiel in his book Zero to One made a good point about capitalism and competition. To paraphrase him, he stated that “most people view capitalism to be somewhat synonymous with competition. He says competition is the opposite of capitalism. Capitalism is about having the ability for some period of time to have a monopoly. It is in times when you monopolize a market that businesses generate higher profits. Competition yields lower profit. It is the ability to have a monopoly for some period of time that drives innovation.”

In the benefits brokerage business increased competition did not drive down profit margins for most. I think this environment may actually have resulted in less innovation because there was no need to try and create a monopoly, at least for some period of time, to maintain profit margins.

The benefits business is certainly under attack. It is also just one law away from being turned on its head. If an individually purchased medical insurance plan were made to be tax deductible from dollar one the benefits world would change overnight. With a Republican Congress this could happen. Other industries were one law, one innovation, one stock market slide away from changing forever. We all know the casualties: Blockbuster, Kodak, Travel Agents, Merrill Lynch, and Motorola are just a few. Others are struggling like McDonald’s, Yahoo, Dell, and even Microsoft.

So I think it is time to get on offense and innovate. This may not be easy when there is no culture of innovation or your producers have had years of developing the habit of playing not to lose. And is the benefits brokerage business an industry where there can be significant innovation? Or should a broker look to partner with others that are innovating? There are opportunities out there. There are new technologies, ACO’s, mobile health, and the opportunity to directly engage the consumer via web and mobile. But one needs to be sharp. Be creative. Willing to take risks. Play to win!