Seven years ago, with the soft market pressuring revenues at all brokerage firms, Arthur J. Gallagher & Co. revised its business strategy. Gallagher, long the leading middle-market broker, looked to further penetrate and expand in its traditional marketplace.
Today Gallagher is the fourth-largest brokerage firm, behind Marsh, Aon and Willis, with brokerage and risk management revenues expected to top $1.4 billion in 2006, up from $638 million in 1999, when it decided to change its strategy.
"It was clear," says James Gault, president of Arthur J. Gallagher brokerage and risk management, that we needed to "get the best people at the point of attack (with the client). So we set up a whole new career path for our people: the industry practice groups."
Gault explains that Gallagher knew its best brokers were rarely "jacks-of-all-trades," but were really turned on to their areas of expertise and the clients they worked with. Why not set up teams based on that expertise? "We made that our national market platform," says Gault, a 30-year veteran of Gallagher.
Gallagher began to recruit specifically for those industry niches. The strategy has paid off handsomely for Gallagher with consistently increasing brokerage revenues, strong margins and expanding client relationships.
As Gallagher built up its practice groups, Gault anticipated Gallagher brokers would get higher visibility with clients in its niche markets. Last year, Gallagher had eight brokers listed in the Power Brokers; this year, 16 are on the list representing the key market segments that Gault identified.
While Gallagher continues to be seen as the largest middle-market broker, this visibility and industry expertise has enabled it to land significantly large national accounts in those key industry segments.
"It can be harder to grow profitable with the very largest accounts," Gault says, as risk often becomes commoditized among those markets of the very largest clients. "For the big brokers, the middle market isn't their core strategy." But that gave Gallagher the opportunity to build on that middle-market space and pick up "more and more momentum among all accounts in those niches," he says.
Size, Gault explains, is not the critical factor to clients. "Our clients don't care who is the biggest broker. They care about what you can do for them."
With its niche strategy, Gallagher makes it worthwhile for brokers to become industry experts with the idea of getting "the people with the best intellectual capacity in front of the clients in those niches," Gault says. Commissions are shared among a matrix of account team members.
For Gallagher, the middle market begins with clients that have premiums of more than $250,000. The top end is those clients that lack a risk manager or risk management department, so that "we can play the role of the contract risk manager," Gault says.
He explains that, when Gallagher began to implement the new strategy, it chose to focus on markets where it had a strong history of ongoing relationships, like the ones it had with public entities and shopping centers. From there, the firm expanded those niches.
Gallagher now has 20 industry niches, including higher education, energy, technology, real estate and health care.
The industry niche focus is overlaid with the more typical regional focus, along with niches for particular risk and insurance product and service lines, like workers' compensation, captive services or property insurance.
The result is that clients can get expertise anytime they want, anywhere they are located, but still have a point-person to foster and grow the relationship, always a critical part of a middle-market dynamic. "For us, virtual brokerage teams became the reality," Gault says.
Risk executives interviewed for the Power Brokers say the Gallagher winners often inspire near devotion. These risk executives typically praise creative and innovative solutions that the Gallagher brokers are able to bring to some exceedingly difficult problems.
Gault insists that the middle market is special. "In the middle market, you have to slug it out. The phone doesn't ring, you have to go out there and win the business."
He adds: "It takes time, and we haven't perfected it yet. You can't change culture overnight, but we're making progress."
JACK ROBERTS is editor in chief of Risk & Insurance®.
February 1, 2007
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