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Technology Cannot Save Broken Business Models

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There’s an interesting post discussing the Future of Tech in the Brokerage making the rounds of the RE.net by Harper Thorpe, a senior executive at CoreLogic. It’s a great post, and fully worth a read. I urge you to read the whole thing. In the post, Harper makes the point that success or failure as a real estate brokerage depends on investment in, management of, and utilization of technology:

Today’s broker must have a commanding position of technology leadership. The good ones have chief technology officers and programmers on their staff. Few are programming brokerage systems, but most are playing the role of the technology integrator. Planning good technology strategies, selecting products, and managing vendor relationships take a special skill.

Because of the complexity of technology, few brokers have the expertise or systems in place to grow. Moreover, large brokers are having greater challenges at maintaining their size because they lack technology solutions that allow them to compete. The ability for today’s brokerage to manage real estate technology platforms represents the inflection point between successful growth and failure. Tomorrow’s winners will be using real estate software including contact management systems, virtual offices, and real estate web sites. [Emphasis added]

But the overall premise that Harper starts from, in which he acknowledges that the singular challenge of running a brokerage is in competing with what he calls “irrational competitors” is what I think is the more interesting point. That deserves further examination.

My own view is that no amount of technology can overcome fundamentally broken business models. All that technology does is make existing processes more efficient. To the extent that competition with irrational people is what drives technology adoption, I cannot acknowledge it as a solution to the problem, much less an inflection point that will dictate success or failure.

Irrational Competitors Lead to Irrational Practices

Harper makes the case in compelling fashion:

Part of the dilemma of operating brokerage today involves competition against irrational competitors. Today’s top producing agents provide little, if any profit to a brokerage. They are recruited so heavily with such incentive that the benefit is usually measured in padding sales volume, offering little contribution to broker dollar. In many cases, the same economy emerges with real estate teams.

The sweet spot of enhancing broker dollar in real estate today is getting more out of the agents in the lower to mid levels of industry production. The challenge here is training, coaching, and evangelizing best practices are hard work. To be successful, systems need to be place to constantly guide and track agents toward activities that lead to great outcomes. Examples of these systems include real estate lead software and contact management systems. These technologies can play a great role in leveraging your less experienced agents, and it an absolutely imperative when your company reaches more than 100 agents. [Emphasis added]

Indeed. I think Harper summarizes the core problem of contemporary real estate brokerage in two paragraphs. The top producers are loss-leaders for the brokerage, hired on to “pad sales volume” and to multiply the number of yard signs. To the extent that these yard signs, or the padded sales volume numbers can generate either (a) more business for the brokerage, or (b) more recruiting, as agents want to join the “top shop in town”, the top producers can be regarded as a marketing expense. Since brokerages are in business to turn a profit, what it means is that brokers have a vested interest in having less experienced agents do more business. This doesn’t make them bad people; it makes them rational businesspeople trying to deal with an irrational system.

Technology, especially lead software and CRM systems, is held up as a solution to dealing with irrational competition. I can’t agree.

First, let’s consider from a brand standpoint the idea of “leveraging your less experienced agents”.  Most service businesses would rightly want to provide the highest level of service. Not so with real estate brokerage. It is in the broker’s interest to provide less expert service, less experience, less knowledge, because those agents offer the highest profit margins to the broker. If a web-lead is generated to the brokerage, he wouldn’t want to send that to his top agent who knows the most about a particular neighborhood — he’d lose money on that deal.  He’d want to send it to some newbie who’s on a 50/50 split with the company.  (Of course, in practice, the broker would need to balance whether that newbie could actually take the lead all the way to closed escrow, so he’d do a risk-analysis in his head/gut first.) The broker might recognize that sending customers to “less experienced agents” may have a detrimental effect on his firm’s brand, but the financial realities do not allow for anything else — especially if his company reaches more than 100 agents.

Second, most service businesses balance the highest level of service with practical considerations of limited supply through pricing, and let the customer make the choice to spend more for higher quality or spend less for more value. The senior partner at the law firm charges far more than the junior associate, and the client would decide how much he’s willing to spend to get the “better” service. The owner of the hair salon charges a different rate than one of the junior stylists. And so on. Given that the customer would pay the same whether he uses the most experienced top producer in the brokerage or the newest graduate of the real estate school, such pricing signals are completely absent in brokerage.

Third, given these irrational factors, the business model of brokerage is roughly the following:

  1. Hire newbie
  2. Train, coach, evangelize to get newbie to become more experienced, making money all the while
  3. Once newbie is experienced, she becomes a loss-leader and is no longer profitable
  4. Rinse & repeat

Churn is inevitable. It’s built-in to the system: it’s a feature, not a bug.

Technology Accelerates Existing Processes

I have long held that technology merely makes existing processes more efficient. Applied to the above cycle of hire-train-lose money-hire, all that a lead management system or a CRM system would do — without fundamental changes in underlying processes — is shorten the time between recruiting a new agent and needing to recruit another new agent to replace the no-longer-profitable experienced agent.

Over the last couple of years, I’ve come to believe that most brokerages waste vast amounts of money on newfangled technology systems, and throw millions of dollars away on new websites, social media strategies, online marketing, CRM systems, and the like. They spend tons of time and energy and money training, motivating, managing, and evangelizing the less experienced agents in an effort to maximize profits… and fail to see those profits materialize. They often blame the agents for their laziness or stupidity (and to be fair, quite a few are one or the other, or both), or believe as government union bosses do that the problem was that they didn’t spend enough. $500,000 on a new website didn’t move the needle on profits? Well, clearly, it’s because you didn’t spend $2 million on it.

Might I suggest that next time, before you greenlight the tech budget that your CTO wants, or okay the awesome new marketing campaign from your Director of Marketing, you take a rational look at your underlying business processes? If those processes are broken, then what you need is not technology that improves your ability to do commit financial suicide faster, but disruptive technology that will let you change those broken processes.

Put differently, what you need is technology that will let you leverage your most experienced agents to generate more profits out of them. Seems to me that trying to work that sweet spot of inexperienced agents faster so they become money-losers for you even faster is… what’s the word… irrational.

-rsh

4 COMMENTS

  1. Thanks for the feedback, Rob. This whole concept of business process is a big challenge for brokers. In a utopian world, performing the activities that lead to success in real estate would be steady and consistent across an enterprise. If a broker has good business processes, great technology will support it. We would like to think that great software does just that.

    Our experience and research has proven out that many agents of all skill levels skip important steps. Sending thank you notes, marketing open houses in the neighborhood, attending civic meetings, training, calling past clients, following up on inquiries, just to name a few.. These touch points are vital to success in real estate. Many great agents do these things religiously. Top producing agents often hire assistants to make sure they do not miss a step. I think that you would agree that taking a business process and dropping into a calendar of to-dos is an effective way of keeping pace with the business process that leads to success.

    The challenge for brokers today is spreading good business practices across the enterprise. Many brokers do not have them at all. For those that do, our software allows them to share plans with every agent. Think Buyer Plan, Closing Plan, Prospect Plan, Listing Plan, New Owner Plan, Sphere of Influence Plan, Website Buyer Leads Plan, and so on.

    Sure, we load stock plans – but we expect the broker to make changes and add their own. And we help them (software as a service). The same is true for agents. If an agent has special process, they can modify the plan, add their own plans, etc. The good news, is that they are planning their work and working their plans.

    Again, thanks for taking the time to have a look at brokerbuzz. We will have some more articles coming out this week and a new website is very close to launch.

    • Thanks for the comment, Harper. I completely agree that great software supports good business practices, and that many brokers simply do not have good processes in place.

      The bizarre thing, of course, is that given broken business models, all that software would do is turn their currently-profitable mid-level agents into non-profitable top producers faster. I’m certain your software is amazing and does what it says it will; but if the base model results in the cycle of churn and burn, then the brokerage is just accelerating their own doom.

      I suppose I wish that more brokerages spent time on looking at their business processes before they go looking for software that will make them more efficient. 🙂

  2. I’ve had discussions with several people who were interested in my running the lead generation/marketing side of a national virtual brokerage a la expRealty. I was not interested because their business model was essentially sign-up everyone and earn what you can off them…and I’d get a wee percent.

    It’s much more profitable for me to generate leads for high performing agents at brokerages like ReMax where they can pay me 10-20%%, etc..for being their virtual marketing department. The best part though is protecting consumers by steering them towards experienced, ethical agents who won’t screw their clients intentionally or through lack of experience.

    I’d like to be part of a brokerage that recruited based on this premise… “Agents, we want you to be THE Local Expert in your niche. We want you learning and networking, mediating and negotiating. Our tech-savvy support staff will handle the technology, social media, cold-lead follow-up, etc… You’ll work half as hard, generate a lot more business, and earn more money – then you would at 100% somewhere else. You get to be a real estate expert…not a technology, marketing, or administrative expert.”

    That doesn’t totally fix the broken model of course.

    Can you imagine an oDesk for real estate?

    What consumers really need is a team approach that helps them construct a long-term vision for the lives/families that includes financial planning, real estate investment, and probably some marriage and family counseling with a follow-up and accountability system. Family Asset Planning if you will which is more than buying a home.

    I always thought it was stupid that buying a home primarily involves a real estate agent and is disconnected from the rest of these issues.

  3. Great post, Rob.  At my brokerage we are pretty good at generating, and far better than most at retaining prospects and getting them to close. However, the point that you make is a critical one. Most newbies, who would theoretically get the broker a higher return on leads, are completely incapable of executing.  The old pros, who could do a great job, are sometimes too busy and will typically get you a small return, due to their compensation realities. So, your best bet is the mid level agent. They have experience, are hopefully hungry and know what they’re doing.
    Personally, I am having some success with starting newbs out on rental leads to let them learn, then working them into entry level homes as they gain experience. Batting practice if you will.  I also work with them one on one at first.
    The most frustrating thing is that Realtors (as a group) are somewhat independent, disorganized, lacking in sales skills and tech challenged.  This does not bode well for their abilities to make me money with internet leads.

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