Great expectations Featured

8:00pm EDT July 28, 2006
 When J. Hyatt Brown examined his company’s balance sheet in 1982, he was deeply discouraged.

For the previous two years, he and his employees at insurance agency Brown & Brown Inc. had been focused intensely on the company’s goal of doubling revenue from $2 million to $4 million. But while revenue had, in fact, doubled, the company’s operating profit margin had dropped from 16 percent to 8 percent in that same two-year period.

“So we made the exact same amount of money two years later, and we’d been working like crazy,” says Brown, chairman and CEO. “At that juncture, we decided we’re not probably doing this right.”

Rather than change the company’s core business, Brown thought a better solution was to change the company’s culture instead. He would get people in each of the company’s offices (Brown & Brown calls them profit centers) focused on increasing earnings instead of on increasing revenue, and he would give them the motivation and tools to do so.

Brown thought the most effective way to get employees focused on that common goal would be through a culture that motivates people with personal incentives. And with that thought, Brown & Brown’s meritocracy was born.

“It’s a structure that encourages and allows people to rise or recede based on their abilities and how hard they work,” says Brown. “It doesn’t matter at Brown & Brown what your name is or where you went to college or what’s your race or religion or creed. If you put your shoulder to the wheel and you’ve got the goodies, you will rise — period.”

Rising to the challenge
While the principles behind a meritocracy are simple, the culture’s success at Brown & Brown — with more than 4,600 employees at 150 locations in 33 states — depends on clear goals and standards.

In Brown & Brown’s meritocracy, compensation plans are directly aligned with increased earnings per share, from the office managers to department heads to individual producers. Regardless of level, everyone has a budget within a budget to meet.

“You must grow your earning at each profit center by 5 percent or more each year, or your income recedes,” says Brown. “So the more they sell and the more they retain in terms of renewals, the more money they make. If the producer makes more money, the profit center makes more money, which means that the agency ... makes more money.”

Those who are underperforming are not permitted to affect others in the office in a negative way.

“If you allow one underperformer, then the person sitting across the room who’s responsible for another department says, ‘Well,why am I going to work so hard since they’re allowing that person to underperform?’” says Brown. “In a meritocracy, you have to be very protective of performers.”

Employees struggling to meet their goals get development assistance and copies of the quarterly reports on all the company’s offices.

“They are distributed to each office so that each department manager and the head of office can look at those numbers and determine where they are in the pecking order,” he says. “So someone [who] is not doing well then has further access to all kinds of data about how the ones that are performing well are being operated.

“We will help them, but if they just can’t make it happen, then they have to be changed.”

The other component that makes Brown’s meritocracy a success is the company’s decentralized nature. Employees may have common goals, but they won’t all reach them by the same route, something that Brown sees as a positive because it means people are thinking like entrepreneurs.

This decentralization is also a powerful recruiting tool and helps when the company, which made 32 acquisitions in 2005, is seeking to acquire additional companies.

“Some people simply don’t like a decentralized culture because they want to be guided and told what to do,” says Brown, “We want them to be true entrepreneurial Americans and do what’s right for our insurers and do it quickly, as opposed to having to be told what to do.

“We don’t centralize the authority. It’s very difficult for someone sitting in a central city — New York, Chicago, Los Angeles, Houston, wherever it is — to make decisions for offices who are selling and servicing insurance in another location. The strongest people, the ones that are best able to make the decision more rapidly, are those that are right on the ground.”

As a result, each of Brown & Brown’s managers is essentially running his or her own mini-company. Each has responsibility for budgeting, hiring and firing, as well as coming in to save struggling accounts when necessary. Managers are expected to bring real value to the office as opposed to just running the show.

“Our people aren’t administrators; our people are leaders,” says Brown. “And so leaders, then, must be able to solve problems. They bring solutions.”

Although each office has its own system of doing things, everyone is expected to provide the same high-level of service — the one consistency Brown demands.

“If you’re not providing good service, you will be a nonperformer, and you won’t be with the company,” says Brown.”

Structured for success
Brown & Brown has also taken measures to make sure its culture can achieve what it was designed to do. In Brown’s case, that meant eliminating the formation of fiefdoms.

“Fiefdoms are little companies inside big companies where a leader tries to pull to his or her breast the leadership group within that particular region,” says Brown. “So therefore, they aren’t necessarily doing what’s best for the company, they’re doing what’s best for John Smith or Mary Jones.”

At Brown & Brown, it would be very easy for a regional manager to create a fiefdom where he or she was the know-all, end-all, says Brown, and what that regional manager does might be different than what Brown & Brown’s culture dictates.

“Turf battles undermine careers and companies,” says Brown.

To prevent that from happening, Brown & Brown uses a process called “flipping.”

“What that means is, let’s say John Smith or Mary Jones has 20 offices or 15 offices that report to them, then we are constantly moving reports to someone else,” says Brown. “So you may have Nashville, Tenn., reporting to you for five years, and then on the sixth year, it’s reporting to another person.

“That’s a further curve against creating a fiefdom so the people aren’t loyal just to a regional person, they are loyal to the company.”

While some people might consider that constant change counterproductive, Brown considers it stimulating and in the best interest of the customers.

“One of the code words in our company is that the only constant is change,” says Brown. “So if you are afraid of change, then you wouldn’t like Brown & Brown.”

While Brown & Brown’s culture is strong, it’s not very formalized, and Brown sees room for improvement when it comes to corporate communication. He has taken steps in the last few years to remedy that, starting with a quarterly meeting of the 10 regional managers to compare notes on what they’re doing that works and what hasn’t been so successful.

“There’s just a plethora of detail that is being accumulated,” he says. “If you take an office in, let’s say Las Vegas, why is it doing better than an office in Albuquerque? And what are the characteristics? Is there a difference in the mix of business? Is one office older than the other? Has the head of office been in place for a longer period of time? Is the head of office someone who is going out and producing business and helping to produce business for others — all those kinds of things. ... Then that will be fed back out to the leadership.”

He’s also created a new executive position — an executive vice president for leadership and development — that is charged with setting up measuring devices so that all employees have a clear idea of what is expected, and the measurement tools are clearly defined. Part of this involves standardizing the annual review process.

“What we have to do is make sure that we don’t allow anyone who is not performing to assume that they are, and therefore be misled,” says Brown. “The most difficult piece of the annual review is talking about the shortcomings. The only way that someone can get better is if they understand that, understand the shortcomings, and then we try and help them.

“It’s really objectivizing our measurement system and then identifying people in our leadership groups and helping them to be better than they are or better than they thought they could be.”

The company is trying to improve its employee development by revamping Brown & Brown University and creating a training school for managers. Brown has also taken care to not let any one office get so large that the office manager can’t frequently and effectively communicate with employees.

The culture at Brown & Brown has allowed the company to increase dividends for 53 consecutive quarters, landing the company on the list of Mergent’s Dividend Achievers — companies that have increased their dividend every year for at least 10 years, a feat accomplished each year by 3 percent of all publicly owned, dividend-paying companies in the United States.

For more than two decades, the company has seen its operating profit margin climb from 8 percent in 1982 to 24.6 percent in 1990 to 37.6 percent last year.

And with revenue increasing from $646.9 million in 2004 to $785.8 million in 2005, the company is also within reach of achieving its goal of $1 billion of revenue with a 40 percent operating profit margin.

The key, says Brown, is to acknowledge that there is always room for improvement.

“We’re not a static organization,” he says. “If we can find a better way to do something, by gosh, we’re going to do it.”

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