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!