Brokers & Carriers

A unique approach to mergers and acquisitions – “Partnerships”

Tuesday, July 9, 2024

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The Baldwin Group helps brokerages scale up with better technology and improved market reach.

Over the last several years, The Baldwin Group — an innovative independent insurance distribution company — has seen tremendous growth, organically and inorganically. While The Baldwin Group leads on the organic growth in the brokerage industry, it also pursued the inorganic path of “partnering” with high-quality brokerages. The inorganic growth added diversity to their portfolio, but it also comes with challenges, especially when it comes to integrating technology of many businesses.

As The Baldwin Group’s Chief Digital & Information Officer, Raj Kalahasthi and his team are responsible for all things technology and security in service of their stakeholders: The Baldwin Group’s clients and colleagues. The technology team deliver platforms that provide risk management insights to clients and aid colleagues with the solutions so they can effectively advise and service clients. The technology team is also responsible for supporting the creation of a unified business through integration of technology across the partnerships. Integration is often an intense period of change and adoption as broker partners join the firm. Kalahasthi describes the approach as having two pillars or cornerstones. 

“Take a step back and think about what’s critical for our clients,” says Kalahasthi. “There are two pillars, or cornerstones, for success. One is trust, we must earn that every day by providing the right advice and coverage for our clients’ risk needs and being there in the moment of truth in the event should things go sideways. Next is transparency, transparency into what is in the best interest of clients – choices of coverage, pricing, etc. To deliver on these, you need talent and technology. Talent because you need professionals who combine their insurance expertise with that of the clients’ industries to offer the best advice and solutions. Technology is the other crucial component needed to get things done seamlessly, share access to insights, enhance collaboration with experts, and provide the right information at the right time with ease.”

Here, he discusses the challenges and opportunities associated with combining technology stacks in merger and acquisition (M&A) scenarios within the brokerage industry.

What are tech stacks and why do they matter?

“Tech stacks are a set of technologies that the end user, such as clients and colleagues, use every day to conduct business. I think of tech stacks in two parts: below and above the surface Above the surface, it’s what we interact with daily, such as email and other collaboration tools, analytical solutions, and all other applications that make a client and colleague journey seamless. 

Below the surface is the foundation, or the rails, that keep everything running smoothly and on track such as cloud computing, networks, etc. Security mechanisms are built into the entire fabric above and below to protect the firm.

All these matter in the tech stack; you need the right foundation to scale as you grow, protect against a dynamic threat environment, and the applications will evolve with changing client’s expectations and firm’s strategy.” 

What is the current state of technology in the brokerage industry?

The insurance brokerage industry is undergoing a significant transformation driven by technological advancements like Cloud, AI, etc. The firms that combine technology with insurance expertise create a digitally fluent workforce and data-driven culture that will gain outsized advantage in attracting talent, gain revenue, and become more efficient. 

“Technology is helping improve the scalability of brokerages and expand reach without increasing overhead costs as they grow. This is where ‘below the surface’ or foundational technology comes in, as well as the negotiating power that comes with the technology partners you work with. Overhead costs will not be directly proportional to growth. That’s where the scale helps in terms of market reach and access. Scalability also enables brokerages to have better negotiations with stakeholders, insurance companies, or Insurtech partners. 

Technology is enabling operational efficiency, through automation of many activities in the client and colleague experience and makes it less painful, if not seamless. You never automate someone out of a role; you automate the things that create friction. You automate to make it easier so the person can focus more on high-value activities versus pushing paper or other time-consuming activities. Once you build the right technology muscle, along with the force of data and AI, your company will start having a competitive advantage.”

How is technology impacting the trend of M&A in insurance brokerages?

“My background is in the banking industry, and what’s been happening with insurance brokerages is what happened in banking since early 2000s. What used to be tens of thousands of banks has now condensed into a few thousand. Only the top twenty banks have been ruling the roost since the 2008 banking crisis. While we don’t have that same crisis in insurance, we do have the same phenomenon. Mergers and acquisitions are helping brokerages improve scalability, provide better access to technology, and improve market reach.

When it comes to technology, it’s quite an investment to get to the point where you’re using it to your advantage. You need some sort of scale to invest in all the right things. Mergers and acquisitions help clients get to the right scale so they can invest in technology and expand market reach.”

What are the motivations behind M&A in the brokerage sector?

There are many different motivations and objectives, but usually it’s to expand market share and geographic reach. Next, it’s to have access to capabilities — technology or domain expertise — you might take a longer time to build on your own. If you don’t have enough scale, it’s very difficult to make investments in technology, so merging or partnering will help just to keep up to speed. Next, it’s to meet changing client and colleague expectations. Clients need help with more complex risks and more choices, while colleagues want access to experts, markets, and modern technology solutions to serve the clients.

What kinds of challenges are encountered during the integration process? 

“The biggest challenge is integrating the culture of one company into another and it’s often more complex than integrating technology. 

Next, when we start looking at technology, each company has their own toolkit or set of choices. Various toolkits don’t work with each other because they are built on their own tech stack, so this can create issues. 

Third, when all the data resides in multiple silos and is built in different systems, how do you bring it all together? This is important for both public and private firms, but particularly critical for public firms because it affects business operations, reporting requirements, and shareholder agreements. 

Lastly, there are social constraints. Everyone in the business may know there are important issues to tackle, but because the business owner has a business to run and so many issues to attend to, there is no time for resolving all the challenges that arise during integration. However, if you don’t focus on it, these issues will simmer and inevitably, start blowing up.”

What strategies does The Baldwin Group use to overcome these challenges?

“We’re learning all the time and tweaking our playbook, but our main strategy is due diligence and aligning on the cultural aspect of the business from the beginning. From day one, The Baldwin Group partnership and leadership team does a great job on this. 

Next, it’s all about aligning on what success looks like and what to expect once you’re part of The Baldwin Group. Success is different for each firm, and having it laid out is important. There are some negotiables and some non-negotiables. For example, some of the non-negotiables are related to financial reporting standards, security, and being a public firm — these simply cannot be compromised. 

Some partners come with a certain toolkit that is really working for them. We learn and deploy those best practices across the firm and make it a two-way street and get better together in the process.

At The Baldwin Group, we have a special team focused on integrations to execute at a rapid pace, keep the lines of communication open with partners, understand what’s going well, and what needs to be tweaked. This open communication is important because if you don’t do this well from the start, it can take five years, the process can be painful, or worse — you may never get there.”

Partner-to-partner is the key to success

When it comes to The Baldwin Group’s successful outcomes, Kalahasthi says, “Well, we certainly are not the largest firm, at least not yet, on the market. Despite this, we’re able to attract high-quality, client-focused partnerships even more than our large competitors — in a seller’s market over the last few years. It’s a testament to how we align on the cultural side, and how we can deliver on the technology side. Our merger partners are seeing success and are growing much faster than they were able to grow before they joined The Baldwin Group.”

According to Kalahasthi, this is all a reflection of how The Baldwin Group delivers on its promise to our partners and becoming better in the process. “I attend conferences with other agencies and brokers and people love our story, what we’re doing, how we’re doing and where we’re headed. Some outright say, ‘We love to partner with you.’ I think the difference is that we’re partnering with these firms instead of acquiring them. It's a marked distinction of how we go to market and how we partner along the way.”

Tuesday, July 9, 2024