Notorious R.O.B.

Pocket Hercules (Photo by Sam Greenwood/Getty Images)

Aaaaand I can hear the tee-hee’ing going on in Costa Mesa from here.  While I’m not above making cheap jokes in order to erect a logical argument about brokerage performance, business dysfunction, and customer satisfaction, this post is actually about serious issues in real estate, technology, and marketing.  So stop giggling.

We begin with a question: does the size of a brokerage matter in real estate?

I have argued in the past that the Big Broker holds the key to the future of the real estate industry, and that small independents and boutiques will end up surviving on the good graces of the various titans in their markets.  Of course, that argument was counter-factual at the time I made it (over a year ago now) and I conceded that as the industry was then, big brokerages were boned.  What I argued then, and still believe to some extent, is that the Big Brokerage with the will to change has the resources to do so.  But in the almost year and a full quarter since I wrote that post, I don’t know that I’ve seen too many examples of such visionary brokerages.

Meanwhile, technology continues its remorseless march.

Then comes this paper by one of the pioneers of the blogosphere: Glenn Reynolds, aka, Instapundit, the Beauchamp Brogan Distinguished Professor of Law at the University of Tennessee.  If you’re at all interested in the impact of technology and of the Web (and its offspring, social media) on the real estate industry, I urge you to read it in full.  While it is a scholarly paper published in a law review, it’s written in plain English for the layman, and does not deal with legal issues as much as it does with business and social issues.

The implications are profound, and the questions Reynolds raise are significant.  And insofar as law is the epitome of professional services, and one that many realtors look to as an example of client-driven professional services, changes in the legal business model are something we should pay close attention to.

This will be a multi-part post, as the topic is large enough and complex enough to warrant breaking up into bite-size pieces.  This first part focuses on understanding Reynolds’s argument as it applies to law firms, then extrapolating similarities to real estate brokerages.

The Reynolds Argument in Brief

Much of what Reynolds published in the Hofstra Law Review article comes from his book, An Army of Davids.  He posits that advances in technology, particularly computing, telecommunications, and the Internet, create efficiencies for small companies or even individuals that allow them to beat much larger competitors in the marketplace.  This, we’ve heard, ever since the first PC was shipped to the first customer.

What few of us have thought about is where Reynolds goes next:

This observation is commonplace now, of course, but its implications for Galbraith-era economics have gotten somewhat less attention. It‟s not just that fewer people can do the same work; it’s that they don’t need a big company to provide the infrastructure to do the work, and, perhaps even more importantly, they may be far more efficient without the big company and all the inefficiencies and stumbling blocks that its bureaucracy and “technostructure” tend to produce.

Those inefficiencies were present in Galbraith’s day, too, of course. People have been making jokes about office politics and bureaucratic idiocies since long before Dilbert. But in the old days, you had to put up with those problems because you needed the big organization to do the job. Now, increasingly, you don’t. Goliath’s clumsiness used to be made up for by the fact that he was strong. But now the Davids are muscling up without bulking up. So why be a Goliath? (p.105 in the PDF article; emphasis in original)

He points out that at the dawn and the height of the Industrial Age, size equaled efficiency:  “You can’t run a railroad as a family business” (p. 103)  But he also points out that the age of Big Companies was a departure from the historical norm:

Big organizations doing big things: it’s the story of the nineteenth and twentieth centuries. In fact, it was so much the theme of those centuries that it’s easy to forget what a departure this was from the rest of human history. But it was a huge departure, brought about by the confluence of some unusual technological and social developments.

The advances in technology, and the shift away from an industrial manufacturing-based economy to a knowledge information-based economy, brings things back to the pre-industrial era of artisans, cottage industry, and small businesses.

Size and the Law Firm

Home of Cravath, Swaine & Moore

In the second part of his paper, Reynolds argues that the efficiencies that the big law firms brought to the table in the 19th and 20th centuries (the height of industrial economies) no longer exist:

Like the clients, law firms were taking advantage of economies of scale and scope. A large firm could spread the costs of big investments—at first, a law library, later things like secretarial pools, duplication equipment, and expensive computerized research services—across a large number of attorneys. And, because of its size, it could maintain in-house expertise on a large number of subjects, allowing it to meet clients’ needs for advice on subjects ranging from bankruptcy to intellectual property to labor and employment, without the client having to search out these experts on its own. Big clients and big law firms went together because both were taking advantage of the efficiencies brought about through bigness—efficiencies that outweighed the undeniable costs that bigness also brought.

But in looking at big law firms today, it’s worth asking whether technology has eroded the advantages that once accrued to size. What, exactly, do big law firms bring to the table?

In essence, it seems to me, they bring two things: reputation and resources.

Reputation (or brand) is simply a way by which clients can rely on a big established prestigious firm’s screening processes to hire competent attorneys.  It’s the same reason why big law firms tend to hire at the top ranked law schools: it makes the search for smart competent lawyers more efficient.  (Although I could question the logic of relying on credentials alone….)

Resources refers to things like a large support staff (paralegals, typists, messengers, etc.) that perhaps makes an attorney’s work more efficient.  The less time your expensive attorney spends filling out form letters, the better off you are as the client (or so the theory goes).

Reynolds then goes on to theorize that other institutions, such as law schools, could provide the branding service that big law firms currently provide.  For example, an online directory of Yale Law School graduates broken down by practice area, years of experience, and so on, would make it easier for clients to find attorneys who carry the reputation/brand of their alma mater rather than of their firm.  Combined with advances in information technology like Lexis and Westlaw that render the big libraries of the big firms irrelevant, and telecommunications technology like email that renders the fleet of messengers of the big firms nonessential, it is now entirely possible that a solo practitioner working out of his home could produce legal work on par with the best of the big law firms at a fraction of the price.

Sound familiar yet?

Size and the Real Estate Brokerage

I’m struck by the parallels between the description of the big law firms in the Industrial Age and the big brokerages in the same period.  There was a time when size drove efficiency in both.  For example, when information technology was expensive, the larger firms had the resources to deploy things like databases, computers, and local area networks while the small boutiques simply couldn’t afford to do so.

Even in areas where real estate differs from lawyers, such as advertising (most attorney advertising is sharply restricted by law), in the Industrial era, there was a significant advantage to the purchasing power of a big real estate company.  For example, when newspaper advertising was the primary was to advertise a home for sale to consumers, the ability for a large firm to negotiate a 30-40% volume discount off of standard rates constituted a major competitive advantage.

All of these advantages, like the law firms’ one-time advantage of a fully staffed large in-house library, have become significantly less important with the advent of technology.  Even today, there may be discounts available to the large brokers (or large franchise networks) for online advertising; but the advantage, if any, tends to be small enough to be outweighed by the cost of the bureaucracy and the overhead that size tends to incur.

Furthermore, inherent in the practice of real estate brokerage is a lack of economies of scale that goes beyond even what other professional services like law possesses.  As Reynolds says, big organizations do big things.  But residential real estate is inherently small: it’s usually one family buying or selling one home.  The advantage of bigness was tenuous to begin with, and changes to business realities have driven that point home.

Note that “big real estate” still achieves efficiency from big real estate firms.  For example, for very large commercial real estate projects, a boutique is not likely to be able to match up to the capabilities of a CBRE.  For very large homebuilders, such as Pulte or Lennar, it may be more efficient to find a single big real estate company who can bring a legion of agents, support staff, and so on to take on a project like selling 4,000 units across multiple states.

But for the most part, residential real estate is a one-to-one, small scale transaction where the size of the firm never added much in the way of efficiency.  In the post-industrial world, that problem is magnified.

It used to be — and there may still be some evidence of life in this — that the big brokerages could spend more money on branding and brand advertising such that when a consumer gets around to wanting to buy or sell a house, the name that would pop into his head is that of the big brand.  But the general sentiment around the industry is that the brand of the brokerage doesn’t matter one bit.  Of course, that post (and the NAR study quoted in it) conflicts with studies like this one from Century 21 that suggests that brand awareness does matter.

What one could say with a degree of certainty, however, is that whether brand does or does not matter, the branding advantage that bigness might have conferred is no longer as large as it once may have been.  (In a sense, as we’ll see in the next part, the hoopla around real estate brand is entirely misplaced.  It would be more accurate to say that whether brand matters or not to the consumer is almost entirely incidental.)

And the parallels continue even in possible solutions.

Reynolds thinks that perhaps Bar Associations or law schools might provide the kind of reputational filtering that big law firms provide today to help clients find quality lawyers.  A fairly significant number of people in real estate believe that it is the MLS (Multiple Listing Service), or consumer rating websites, or Associations such as NAR, that could provide reputational filtering.  Houston Association of REALTORS recently decided to put realtor performance metrics online, drawing heavy praise from the guys at 1000watt (and yours truly as well).

Whether HAR’s move is good or not is secondary; the interesting thing is that both Reynolds and Boero both believe that the solution to the problem of reputational filtering should come from outside the law firm or brokerages.  Neither believes, I think, that law should disappear as a profession, or that realtors be disintermediated.  They both believe that the attorney and the realtor provide value to the consumer.  It’s just that they don’t think that big law firms and big brokerages do.

Real Estate is Ahead of Law

The post-industrial, post-big, post-Goliath vision that Reynolds has for the legal profession is starting to be the norm within real estate.  As much as realtors look to lawyers for things like client service philosophy, fiduciary responsibility, respectability, and the like… in this one case, lawyers could learn a lot from realtors.  Many realtors are already free agents in all but name.  Even if they are affiliated with a big real estate brokerage, they don’t report into the office, they don’t rely on the big infrastructure advantage, and have returned to the pre-industrial, artisanal way of doing things.

Such independence brings challenges and problems of its own, of course, and as lawyers might be looking over the horizon at what the future of the law firm looks like, they might look at real estate companies very carefully.

Next…

In the next part, we’ll examine some fundamental ways in which Big Law and Big Real Estate differ from each other, and the consequences of that difference.

-rsh

Related posts:

1. Imagining the Future, Part 2: CRM — The Killer App