In Part 1, I explored how large law firms and big brokerages are similar, based on the forthcoming paper by Glenn Reynolds, a law professor and blogging pioneer. Then in Part 2, we looked at how they’re different in some fundamental ways, particularly compensation models, that makes the size of Big Brokerage appear to be all of the disadvantages with none of the advantages.
In this Part 3, I would like to explore how size could be made relevant again. There are still areas where size does matter, even in real estate. And the future of the industry really depends on how big brokerages respond to the rapid changes in the social and economic marketplace. Up to this point, most have been extremely slow to react, believing that a strategy of evolutionary adaptation makes more sense than a risky revolutionary act. I no longer believe, if I ever did, that slow evolution will get the job done for the giants in our industry. The window of opportunity is closing, and quickly at that. Unless something fairly dramatic is done, and soon, I believe that by 2020, the large brokerage as we know it will be a thing of the past.
So, with that Cassandra moment out of the way, what are the areas where size still matters? And how might big brokerage respond to make size matter once again?
Technology: Size Matters
My previous arguments about why big brokerage will not only survive, but actually thrive, was based almost entirely on how it answered the challenge of technology. For example:
Rather, they have to do it with technology that is yet unavailable to the masses. Two examples: enterprise CRM, and dynamic content management coupled to anonymous user profiling. Imagine those deployed cross the NRT. And that’s just pure technology. Imagine competing with a Big Broker that has an actual, professional marketing and customer relationship team (again, see Zappos.com) empowered with enterprise software.
As of this writing, I am unaware of any traditional large brokerage that is working on big technology projects “yet unavailable to the masses”. They’re building million dollar websites, and iPhone apps galore, but on technology that would actually let the broker offer some unique value proposition to the consumer, through an empowered agent force, there is no news.
Enterprise CRM? Tribus offers it; the GoodLife Team, a six-agent company in Austin, Texas offers it; I have heard nothing about such a thing from the likes of NRT, Long & Foster, and HomeServices of America — just to name three of the largest brokerage companies in America.
GIS systems? Proprietary research tools? Expert systems? Data mining technology? If you’re aware of big brokerages doing these things, please let me know about them.
Even big companies that are focusing on technology, on differentiation, like @properties (#1 brokerage in Chicago) isn’t really doing new technology development as much as they are doing improved existing IT projects (e.g., @properties offers BlackBerry Enterprise Server services, which is rare in the brokerage world, but even they aren’t working on expert systems or data visualization software). Such projects do provide a competitive advantage for now, but in terms of unique value through technology, there isn’t anyone I know of doing that.
Size matters in technology. In fact, one of the reasons why size advantage in fields like law and real estate has shrunk over the past couple of decades is because other big companies from outside the industry, often funded by big venture capital, have risen up. Independent law firms could in no way compete with big law firms without LexisNexis (a division of Reed Elsevier) and Westlaw (a unit of Thompson). Much of the value of bigness was transferred from law firms to technology/information firms through the course of the computer revolution.
Within real estate, the prevailing notion appears to be that there is a power struggle between the old inefficient Dinosaur Big Brands and the nimble techno-savvy Little Guys. I think the real story is the power struggle between Big Brokerage and Big Technology to determine which sector will capture most of the value in real estate transactions. The battle over the consumer web, at this point, appears to have been won by Big Technology (e.g., Trulia, Zillow, Realtor.com, etc.) over Big Brokerage. Mobile real estate appears to be headed the same way. The small real estate companies are being empowered by Big Technology in much the same way that small law firms are empowered by LexisNexis.
Doing technology development requires a few things for success. First, it requires capital; big brokerages have it (at least for now), little ones don’t. Second, it requires professionals; big brokerages have them (or can hire them), little ones generally do not.
Third, and perhaps most importantly, it requires a large enough base of users to spread around the cost of development and maintenance to drive per-unit costs down. Spending $2M on a CRM system is crazy if you’ve got ten agents — that’s a $200K cost per user; it’s not so crazy if you’ve got ten thousand agents — that’s $200 per user. Recouping the investment for a 10,000 agent firm might be a matter of improving productivity by 2%; for a small company, it’s a tall order.
Being big does provide advantages of scale when it comes to existing technology, as Matt Gentile of Century 21 mentioned in the comments to Part 1, “Century 21 Real Estate continues to provide advantages of scale when it comes to online marketing and technology platforms.” Presumably, given their buying power, Century 21 can make something like agent websites available for less to its agents than some small independent could.
But the issue with such advantages of scale in technology is that it becomes a straight cost-vs.-benefit issue, and the advantages are often not enough to offset the costs of bigness (whether monetary in terms of splits, or psychic in terms of bureaucracy).
Technology strategy is today one of the signal challenges for big firm managers.
Branding & Marketing: Size Matters
The second area where size matters is in branding, brand management, and marketing. It seems obvious to say that big brokerages have an advantage in marketing spend. Century 21, to use the example from above, could spend far more on Internet advertising, for example, than could The GoodLife Team. They can do broadcast advertising, and sponsor major sporting events. They can get their names out in ways that little companies cannot.
This has been a frequent topic on this blog, but it bears repeating: until big brokerages take their brand seriously, take branding seriously, with all that such a thing means, they are throwing away whatever advantage that size gives them.
Specifically, big brokerages have to have their brand be meaningful to the consumer. We saw in part 2 how the value of the real estate brand actually accrues to the professional — the real estate agent. As long as that remains the case, the brand doesn’t much matter (nor should it) to the consumer.
So what needs to happen for big brokerage brands to be meaningful?
The answer is simple, yet not easy to hear….
Start with the consumer. What does the consumer want when he sets out to hire someone to buy or sell him a house? We don’t have to start at zero; the NAR Profile of Home Buyers and Sellers is an annual study we can look to for insights. In it, the consumers tell us what was important to them:
Comparable to sellers, buyers chose agents based on a referral or had used them in a previous transaction, with trustworthiness and reputation being the biggest factors in selecting an agent.
Trustworthiness and reputation (for what? perhaps a reputation for being trustworthy?) are what consumers want in a real estate agent. Brokerage brands, then, should be bending over backwards to become shorthand time-saving devices for ‘trustworthiness’ in a realtor — in much the same way that big law firms bend over backwards to have their names equate to ‘brainiacs’.
Seems simple enough, isn’t it? Sure — a brokerage brand should be synonymous with trustworthiness. Obvious!
Except that law firms spend millions, if not tens of millions, of dollars every year in recruiting and training the best and brightest law students they could find. Go back to Part 2 and check out the lengths to which big law firms go to screen out even fantastically talented and smart people to focus only on the cream of the crop. Then they spend tens of millions of dollars paying these first and second-year lawyer larvae inordinate sums of money in order to train them to the firm’s standards of legal practice. And every single year, incredibly talented and even brilliant lawyers “wash out” because they couldn’t make the cut to ascend to the ranks of a partner; whether that is firm politics or not, at least the brand image of the big law firm as being the equivalent of Plato’s symposium is untarnished.
To do that kind of recruiting, to have that kind of selectiveness, to maintain that kind of brand… size is important. A small practice where partners are desperate for help to get out from underneath the sixteen cases each one is handling, for whom expensive recruiting efforts are cost-prohibitive, can’t really afford the level of effort it takes to manage the constant turnover, the constant hire-train-fire routine.
The level of branding where the consumer can come to rely on the firm’s name as an imprimatur of trustworthiness requires control over the staff in a way that is quite difficult for the 1099 independent contractor broker-agent relationship. It requires the firm, the brokerage, to take responsibility over mistakes and to police the agents in a way that is quite uncommon in the industry.
And in order to be seen as being trustworthy, the realtor cannot be seen as having a vested interest in the outcome of her advice. That means compensation via sales commissions are quite anathema to the idea of a trustworthy advisor, no matter how much real estate insiders want to claim that they can divorce their professional advice from their personal income. In fact, from a branding perspective, even if they could actually be dispassionate objective professionals in spite of having a vested interest, realtors will not be seen as fully trustworthy as long as their compensation is tied to the transaction.
So… for brokerage brands to be meaningful to consumers, they must be shorthand for “trustworthiness”. For that to happen, actions must speak louder than words. Brokerages would need to do all of the advertising, marketing, communications, and standard branding stuff they would need to do anyhow, but in addition:
- Have a strict trustworthiness-based recruiting program that is publicized;
- Enforce the ‘trustworthiness’ brand through company policies, and terminating those agents who fall short of the standards, even if highly productive otherwise;
- Eliminate 1099 independent contractor status (in order to have the greater control such branding requires);
- Change the compensation model from commissions on sales to being paid for time and materials.
It is not at all clear to me that any brokerage is yet ready to go down this path. Companies like GoodLife Team go pretty far down #1 and #2; certainly Michael McClure’s ProfessionalOne concept is very big on #1 and #2. They’re small enough that they can do #1 and #2; it is in trying to do #3 and #4 where small companies run into problems. Their brands may be more meaningful, but they’re not quite there yet.
Establishing a real, meaningful brand takes money, takes professional management, takes resources, and takes overhead (e.g., HR and recruiting-as-filtering rather than recruiting-as-sales).
That is why I believe size matters. Bigger companies could pull this off given the will to do so. Smaller companies will have a much harder time of it (especially #3 and #4) due to lack of a serious war chest to carry it out.
Pricing: Size Matters
The third area where size could matter (although it does not today) is in price. (I do not mean the price to the agent-buyer, but the price to the consumer.)
One of the biggest advantages of bigness in industries other than real estate brokerage is that size = economies of scale. Purchasing power increases with size, such that bigger firms are able to acquire equipment, raw materials, supplies, and the like at a lower per-unit cost, which allows them to undercut smaller company’s prices for products or services. Even expensive technology development (as discussed above) is cheaper on a per-unit basis for the big company.
Other industries translate such buying power into pricing power. It’s cheaper to buy bananas at Safeway than at the corner grocer, for example.
Real estate services, however, have historical pricing practices that inhibit price competition. Everyone charges about the same to list a house, and buyer agents are all offered more or less the same payment no matter what, because to do otherwise might result in the property being unofficially blacklisted. That is, even if the listing broker is willing to take a listing on at 1% instead of 2.5%, the buy-side broker is offered 2.5% in order to induce them to bring buyers to the property.
The experience of companies like Redfin, which rebates portion of its commissions back to the buyer, shows that there was implicit blacklisting going on against such discount models. Whether such discrimination still exists today is unknown.
However, assuming that the industry practice could be changed to more of a fee-for-service rather than a commission-on-sales model, Big Brokerage should have significant cost advantages over the smaller ones by leveraging its purchasing power, which in turn should affect its pricing power. For analogues, one might look at companies like H&R Block which employs legions of low-cost tax preparers to offer low-cost tax services to individuals and companies backed up with in-house technology and expert systems, while conceding parts of the market where independents and boutiques and high-end tax consultancies have an advantage.
Nonetheless, that is a world that does not exist today. It may be that the pricing conundrum cannot be addressed without resort to regulation… which leads to…
Politics: Size Matters
The final area where size matters is politics. Given that real estate is a heavily regulated industry at the Federal, State and local levels (e.g., Fair Housing Act, state licensing requirements, local zoning laws respectively), to ignore the role of politics in the industry seems to be engaging in willful blindness.
And yet, Big Brokerage is surprisingly inactive in politics, having ceded that field to REALTOR Associations. The National Association of REALTORS is the most powerful industry lobby on Capitol Hill. State and even local REALTOR Associations are extremely active in state and local politics.
For example, based on this data on lobbyists in the State of New Jersey, where companies like the NRT and Weichert are headquartered, we find that The New Jersey Association of REALTORS employs 15 lobbyists in Trenton. Realogy Corp (parent of NRT) employs 2; Weichert also employs 2; and ZipRealty employs 4 lobbyists in New Jersey.
It may simply be that REALTOR Associations do in fact speak for Big Brokerages, such that the latter need not concern themselves with political issues. In many cases, that is certain to be true; for example, both would want to advocate for something like the First Time Homebuyer Tax Credit.
Nonetheless, it is a fact that in politics, size matters. Big firms with big pockets are fare more able to influence policy than small mom-n-pop shops. If changing the way realtors get compensated became an important strategic issue for a large brokerage, it is entirely conceivable than such a firm could get legislation passed that would allow its strengths of size to become more important.
As it happens, I despise the influence of big corporations on electoral politics. I believe as a voter, as a taxpayer, as an American, that such influence is corrupting. Personally speaking, I would be just fine and dandy with banning all lobbyists everywhere. But as a strategy professional, I cannot ignore how little big brokerages even look to leverage their size and money advantage for political power, to sway regulations in their favor, or to move legislation that would advantage them.
I’m not even sure that there is a real conclusion to be drawn here, except to highlight the challenges in the way of Big Brokerage to make size relevant again. The industry, the technology, the general business environment are all stacked against them. Technology companies have a vested interest in bringing more and more capabilities to market, at the lowest cost possible, thereby empowering the small independents. The industry’s basic practices are setup in such a way that bigness grants few advantages, and numerous disadvantages.
One thing I can conclude is that given these factors, evolutionary change isn’t going to do it for Big Brokerages. Slight modifications to advertising campaigns aren’t going to get it done. A sexy YouTube channel isn’t going to get it done. In today’s economic environment, a company has to decide between going Nimble, or going Big. And Big Brokerage, like any other large organization, is inherently not Nimble. And going Big in real estate requires revolutionary thinking which challenges some of the oldest conventional wisdoms of the industry as a whole, such as compensation.
Forget strategy, forget execution — just mustering up the will to do such a thing is a tall order. Time will tell whether Big Brokerages have the will to launch a revolution or not.
- This is the way the world ends
- Not with a bang but a whimper.
- - The Hollow Men, T.S. Eliot