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The two biggest threats to brokerage business

The best brokerages know that complacency and loss of business culture are their two biggest threats. What can you do about it?

Sometime ago, the leader of a large brokerage operation asked me a question while I was sitting in front of the senior leadership team. The question was: “What are the biggest dangers to our organization.”  The answer: complacency and culture.

The first great danger is complacency

With great success, financial rewards and leading market share often comes a sense of ‘well we made it, we were more right than wrong and look at how well we are doing.”  It’s only a matter of time before the small things start to be overlooked. That leads to weaker performance and, in far too many cases, leadership looks for someone or something to blame for a decline in key performance metrics.

As Andrew Grove, former CEO of Intel (at its height) wrote, ‘only the paranoid survive.’  In our industry this has never been truer. Given the number of well-funded new competitors in the brokerage industry, anyone who isn’t a bit paranoid needs to re-examine their view. 

No brokerage model and business proposition is safe in brokerage. If you take any part of your business for granted — relationships with your agents, gross margin or capture rates — and you can rest assured you are heading for a fall.

The second is loss of culture

After over 40 years observing this industry, it’s clear that business culture is more than just a buzzword. We have watched brokerage organizations of all kinds rise and fall regularly. Looking back at both regional and national leaders, it’s safe to say that, since we first started tracking these firms, there are few that were on top in 1990 that are still on top today. 

At the national level, there have been four different firms that led the nation in housing sales. In most regional markets, reviewing the RealTrends 500 Market Leaders Report, we find a handful of brokerage firms who were the largest firms in their markets then and now.

While some of this is clearly attributable to competition from new and lower-cost models, just as much is due to the loss of the defining and uniting culture that led the firm to the top in the first place. 

What I’ve observed is that it’s a powerful and enduring culture that drives growth as much as any other factor. When an organization starts valuing its metrics or the money earned over the culture, that organization will start to slowly bleed out.  This has happened many times in the past 40 years.

Many ways to measure success

A related issue is what leaders value in terms of metrics. There are many ways to measure success but certainly two of the most common are market share and profitability. When you combine culture with these two metrics, many end up with a conundrum. It’s difficult to maintain high levels of all three. While you may give on culture to gain share and profitability, longer term it can wreck your culture. 

If you give on profitability, you may gain share and keep a good business culture, but without profit you lack the capital to fund growth. 

When you give on market share while keeping strong culture and profitability, your firm is likely shrinking.  These concepts may not be true for all industries, but it’s always been true in residential brokerage.

So what is the answer?

The strongest firms first hold onto their culture, more than anything else. Culture is the defining strength of any business that is primarily built on relationships between people. 

Profitability necessarily comes second with market share the third priority. The brokerage firms that have prospered over the long term have kept their priorities in this order.  In fact we know of few firms that prosper continually when market share is favored over profitability.

With the more intense level of competition in the brokerage business, we think it’s imperative that owners and leaders understand the old adage that when you try to be everything to everybody, you end up meaning little to most

Culture defines what you believe, how you do things, the importance of your people and your behaviors.  As one principal of a highly successful brokerage once commented, “Get your relationships, all of them — between agents and customers, your agents and other firm’s agents, and with your staff — right, and it will all work fine.”  This is one of those rare firms that focused on culture, let go of some market share and has remained profitable.

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