In the marketing domain, organizations the world over are increasingly faced with a dilemma of choosing between developing their own sales force and marketing their products through independent sales representatives. This paper expounds on this ‘make or buy’ dilemma by looking at how marketing activities for insurance covers are done at Oceanic Insurance Company.
It is common knowledge that the insurance field is sales-oriented, implying that Oceanic Insurance Company has to work with the best talents in the sales and marketing environment to survive in the extensively competitive environment.
Owing to increasingly shifting marketing dynamics, the company had to make a decision of either making (developing) its sales force or continuing to buy services from independent sales representatives.
While a sales force consist of workers employed by the company to advance the sales and marketing requirements of the organization, hence bound by the organization’s rules and regulations, independent sales representatives set their own schedules and to a large extent control the sales processes irrespective of the demands or requirements that may be set by the organization.
In making the ‘make or buy’ decision on whether to follow an integrated structural form (sales force) or an independent structural form (independent sales representatives) in marketing, it is always important for companies to do a cost/benefit analysis of initiating either choice.
Additionally, it is important to integrate concepts from channel distribution theory (e.g., transaction costs analysis) when making a decision to switch from one form of arrangement to another. Any viable transaction costs analysis would, for instance, include the risks, expenses and responsibility associated with switching from independent sales representatives to an employee-oriented sales force.
Since its inception in 1980, Oceanic Insurance Company has been using independent sales representatives to sell insurance products to customers across the world.
In 2007, however, the firm made the big switch to an employee-oriented sales force upon realizing that its relationships with independent agents was not meeting set expectations and value, at least according to the transaction cost analysis.
In changing distribution channel arrangements, the company calculated the costs of maintaining independent sales representatives and compared them with the long-term benefits of recruiting a direct sales force.
The contractual understanding between the company and the independent sales representatives was that the representatives were to retain 10 percent of each insurance product sold to a customer. The company calculated that assuming one representative sold 10 insurance covers per day worth $100 each, that particular representative would retain $100 worth of sales as his or her profit on daily occasions.
If this happened on yearly basis, one representative would retain upwards of $36,300 ($100 multiplied by 365 days). Bearing in mind that the company had contracted 20 independent sales representatives, it was not difficult to know that a massive $726,000 ($36,300 multiplied by a factor of 20) was being lost per year as contractual fees to the independent sales representatives.
More money was also been lost in that independent sales representatives are not committed to the goals and objectives of a particular organization since they work for multiple companies.
Although the initial switching costs were high, (estimated at $500,000 in recruiting 10 permanents sales employees, training them and dealing with other responsibilities), it was found that the idea of converting from independent sales representatives to a direct employee-oriented sales force was a viable one in the long-term as per the results of the cost/benefit analysis.
The idea of switching to a direct sales force was also found to be attractive as it was possible for the company to start reaping other strategic benefits associated with having a committed workforce.
Ultimately, therefore, it is important to underline the fact that the selection of one particular structural form over the other (integrated versus independent) should be implicitly determined by the cost/benefit analysis, switching costs, as well as other powerful incentives to change.