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

In Part 1 of this series, I put forth the notion that a real estate company built on the law firm model — rainmaking partners + salaried associates + support staff — could work. The main requirement is that there is some sort of a competitive advantage that arises from the structure of the partnership such that individual rainmakers would want to pool their resources.

But how does such a competitive advantage arise? In this and succeeding parts, I hope to explore some ideas on how it might be possible.

———————

The similarity between legal practice and the post-Internet real estate brokerage is remarkable. In both cases, you have service providers who provide what is essentially a commodity service in all but the extremes, and yet are of varying qualities as professionals.

The typical lawyer does not do only the extremely complex, novel questions of law that end up before the Supreme Court. The average attorney does run of the mill contracts, wills, real estate transactions, incorporations, and typical lawsuits — the so-called “slip and fall” cases, or breach of contract cases, or some such. There isn’t much to that practice — the law is more or less settled in most of the situations, and all that the attorney is doing is to represent his client in the most favorable light possible. Yet, there is no question that some lawyers are simply better than others. They are more knowledgeable about the law; they are better writers, better researchers, and better negotiators. Some speak better than others, and are more effective in litigation. Still others are just smarter, and can help their clients more than another attorney can.

Similarly, in the post-Internet real estate brokerage, where simply matching buyer to property is no longer seen as particularly valuable, real estate brokerage is a fairly commodity service (except at the extremes). Brokers help sellers list a house, market it using various techniques, price the house in order to move it, coordinate various activities with third parties (lawyers, inspectors, government, etc.), and promote the listing in various ways. For buyers, brokers do inventory searches, work with third parties, negotiate on their behalf, advise them on various subjects, and educate them about the real estate process, about the local market, and so on. Again, there are clearly brokers who are more talented than others, smarter, more informed, better educated, and so forth.

In both cases, the consumer is confronted with a conundrum: How do you select a professional for something of which you yourself have very limited knowledge, but the importance of which is extremely high? Pick the wrong lawyer, and you could end up going to jail. Pick the wrong realtor, and you could end up stuck for years in a house built on top of a toxic waste dump.

In both cases, consumers often end up going with either (a) brand names, (b) recommendations, or (c) gut feelings.

For all three — branding, recommendations, and emotional connection — there are enormous advantages to institutionalization for a service provider. In Part 1, I listed five things a real estate firm (“The Firm” hereafter) must do:

• Institutional CRM: The Killer App
• Systemic Brokerage: Learning from Bill Belichick
• Redefine the Profession: Shifting the Grounds of Competition
• Specialization for Domination
• Outsource Everything But Profit Centers

Three of the five are directly related to institutionalization: Customer Relationship Management, Systemic Brokerage, and Specialization. In this part, let us cover CRM: The Killer App.

[CAVEAT: Before we begin, I feel it is imperative to stress once again that in real estate — as in law, or any professional service — the commoditization of the service and therefore the institutional advantage fades. Meaning, if you absolutely MUST have the best criminal defense attorney for your death-penalty trial, you really won’t care whether he’s with Big Law Firm or a solo practitioner. If your company is involved in some ridiculously complicated international tax case, you are going to seek out the absolute best specialist — institution be damned. Same with real estate. If you’re trying to list a $50 million condo, there just aren’t that many people who can service your needs — finding buyers for a $50m house is in and of itself a valuable service. Traditional “transactional” brokerage based entirely on personal relationships may be the best solution when you’re in an extreme situation.

These posts are not intended to address the exceptional cases. They are, rather, intended to discuss the vast majority of non-exceptional brokerage.]

One of the most significant advantages of an institution is the ability to deploy enterprise Customer Relationship Management.

Of course, the number of companies — especially law firms — that do this effectively are few and far in between. The best and most successful ones do, however. And only institutions have the financial resources to undertake CRM at all.

What is CRM?

But first, let’s try to define the term CRM, as there are numerous definitions for it all with slight variations. Most people think of CRM only in a software context, but this is a mistake. Most CRM implementations fail not because of software, but because of the people:

While the term is generally used to refer to a software-based approach to handling customer relationships, most CRM software vendors stress that a successful CRM strategy requires a holistic approach. CRM initiatives often fail because implementation was limited to software installation without providing the appropriate motivations for employees to learn, provide input and take full advantage of the information systems

The definition I like most comes from CRM Today:

Properly understood, CRM is “a philosophy that puts the customer at the design point, it’s getting intimate with the customer,” in Shahnam’s words. (Quoting Liz Shahnam, CRM analyst with the META Group.)

A bit more expansive definition:

Customer relationship management (CRM) is a business strategy that aims to understand, anticipate and manage the needs of an organization’s current and potential customers. It is a journey of strategic, process, organizational and technical change whereby a company seeks to better manage its own enterprise around customer behaviors. It entails acquiring and deploying knowledge about one’s customers and using this information across the various touch points to balance revenue and profits with maximum customer satisfaction.

Perfect CRM is basically what my neighborhood dry cleaner does with no computers at all. She knows her regulars on sight, knows their names, knows how one customer likes his shirts starched stiff, while another likes nothing at all. She knows the names of their kids, knows where they work, knows what kind of clothes they bring in, and where they live (as she delivered dry cleaning to them). She knows which customers pick up promptly, and which ones leave dry cleaning for weeks on end. When a new customer comes in, she inquires to find out if she’s new to the neighborhood, or if she’s just a visitor, or trying out a different dry cleaner. Based on that, she tailors her response (naturally, without calculation) to make the person feel welcome to the town, or recommends things to do and see nearby, or delivers extra special service — and remembers to take extra care with the garments.

As long as one has a small local business that is reliant on a relatively small group of regular customers for profit, this natural CRM that all humans are born with is adequate.

Problems arise, however, when one starts to have more customers than a single person can be expected to remember all the details of, or when there are few regulars and many many irregular customers, or when time becomes an issue. After all, if you’re in the back working, then you’re not out in front of the store greeting customers.

Problem of the Irregular Customer

Both lawyers and real estate brokers face a real CRM problem due to the irregular nature of their customer base. Again, there are exceptions, but few lawyers have a client who is in their office every week with a different legal problem. Similarly, few brokers have a client who is buying a new house every couple of weeks.

When the average sales cycle for real estate is seven years in between purchases, how does a broker maintain a relationship over that lengthy period, remembering everything about that customer in his head? The answer is that he doesn’t. For a local realtor who is a member of the community, he may be able to maintain a relationship with customers as a natural part of being neighbors and members of the same community. Maybe he sees customers at church, or at the local PTA meetings, or at baseball games for the kids. But in the professional context, it is unrealistic to believe that a human being can remember something — and maintain a relationship with someone — over a seven year cycle.

And to be frank, it’s not likely to be worth your time and effort for a sale every seven years.

I believe one of the driving factors behind the “shoe salesman” phenomenon that Sean Purcell wrote about — where a broker employs hundreds of agents, many of whom are part-time, many of whom do the one sale to a friend or family every couple of years — is directly related to the problem of CRM in real estate.

Again, lawyers have the same problem. Even a solo practitioner simply cannot keep track of all of his clients, because he has so few that come back time and again frequently enough to warrant such an effort. He keeps files on clients as best as he can, but in most cases, he knows that it will be an intense relationship for a while, and then once the case is over or the transaction finished, he knows that he’s not likely to see that customer for years on end, if ever. What he hopes for is referral business from that client.

Sound familiar?

Why CRM is the Killer App

For this reason, I believe that institutional CRM is the killer app for professional services. And it is one of the major competitive advantages that The Firm will have over its traditional competitors.

In most real estate companies today, CRM is handled at the agent level. Each client is perceived as belonging to the agent — brokers will even charge their agents for leads in some cases. Producing agents, who are generating business, will rightfully see those clients as being theirs, not the broker’s. They will accordingly demand splits that reflects the fact that they, and not the brokerage, owns that client relationship. Denied the split, they will take their business and walk away — either to a competitor, or to set up their own shop.

However, let us hearken back to the Irregular Customer problem. No matter how good an agent is, unless she is the friends-and-family “shoe salesman”, there is no conceivable way that she can keep track of all of her clients over the typical seven-year purchase cycle. Even if she were a dedicated, disciplined, and far-thinking individual who invests in a personal CRM package like ACT! or Top Producer, there comes a point where she as an individual simply cannot keep up with the demands of maintaining so many relationships, especially if she has day-to-day duties to actually service clients — instead of just managing the relationship with them.

Is it any wonder that the vast majority of agents might send a newsletter or two for a few months, but then disappear from the customer’s mind and vice versa?

The current love affair that so many real estate brokers and agents have with blogging and social networking arises out of this need for CRM. Rather than engaging in the one-to-one marketing that CRM demands, the industry is hoping that the one-to-many marketing that blogs, websites, Facebook, and so forth enables will do the job.

I hate to be the bearer of ill tidings, but… it will not. Blogs and social networks are fine and good, and there are compelling reasons for professionals to do them, but it is a mistake to confuse blogging with actual CRM.

Actual CRM means that you can capture all of the information about a client, and use it to maintain a constant touchpoint, and tailor offerings and marketing specific to that individual client. It means being able to answer phone calls like this:

“Oh, Mrs. Smith — how good of you to call! How is that house on 15 Main Street that you bought three years ago? I see you needed to have some landscaping done — how did that work out for you? You got our email about the mortgage seminar and you’d like to attend? Wonderful!”

Actual CRM means you are able to plan direct marketing based on data-based predictions about profitability. Maybe you don’t want to send Christmas gifts to all of your clients. But your CRM system is able to tell you which clients in your database has been living in their house for the past six years — and with a seven year cycle, it might not be a bad time to put a little extra oomph into your communication with them. It can tell you which clients are living in the most expensive houses, and tailor messages to see if you can get the most lucrative listings. It can tell you what zip codes your buyers are coming from, so you can think about doing more advertising in those local publications. It can tell you where in your sales process you are losing people, where you need to tighten up, and where you are so successful that you need to copy that and reproduce it.

If this focus on CRM results in client retention beyond that which the normal real estate broker currently manages, that will result in greater revenues and profitability for the firm as a whole. For that firm, there can be such a thing as lifetime value of a customer. Furthermore, the expanded and enhanced customer service — derived from knowing not just the what, when, where, and how, but also the “why” of a particular customer — means that referrals are more likely due to superior customer service.

For example, the Firm might send out quarterly market updates, but under a cover letter from the partner who brought the customer in. Such a letter could easily be managed via CRM software to personalize it to the customer, including only items of interest to that particular customer (or at least to his/her sub-segment). When the customer tries to contact the partner who has been so helpful over the years, the partner can easily pull up all of that customer’s information on the computer and converse in a reasonably personal way. For that matter, the partner can pass the client on to a junior associate who has access to the exact same data about that customer, and has been trained in the Firm’s customer-service methodology. (Note that as a salaried employee, the associate is bound to follow the direction and guidance of the employer, unlike an independent contractor.) The customer will receive the consistently good service The Firm can inculcate in all of its people.

An industry that uses CRM extensively and does it masterfully is the gaming (as in Las Vegas) industry. You don’t think they give you those reward cards for nothing, do you? This short online article should be eye-opening for anyone interested in CRM. Money quote:

“You need [attitudinal] information on your customers now. In the past, there was only the transactional history: the how, what, when and where of the deal. Now you need to know the why, because if you understand the drivers, and follow through on delivery, then you can win the deal,” says Cottle.

That is what CRM enables you to do. Imagine knowing not just the how, what, when and where your client bought the house four years ago, but knowing the why they bought that house at that time in that way.

Imagine being able to do lifecycle marketing, where you acquire a first-time buyer — a young couple with a baby on the way — then keep track of them over the years, providing top-notch, personal customer service and customer relationship — such that you can market to them when they’re ready to upgrade that starter home to a bigger house for their now-larger family. Then talking to them as they are able to become empty-nesters. Then talking to them when they’re ready for retirement. All along the way, you know their financial situation, their likes and dislikes about neighborhoods, their preferred styles of houses, whether they like big yards or hate mowing the lawn, etc. That is a client for life — and it is impossible unless (a) you know the person outside of your realtor job, or (b) you have good CRM.

CRM is the killer app of real estate.

The Institutional Advantage

As much as CRM is the killer app of real estate, it is also almost entirely out of reach for individuals. Put another way, if you could afford genuine CRM as an individual, you probably don’t need to be working, as you are already so fabulously rich that you really should just retire to your private island in the South Pacific.

This is one reason why we have not yet seen CRM deployed in our industry as it could and should be. (Although, maybe Redfin has something approaching it, because some of their blogposts are rich with customer data.) When CRM is handed off to the individual agent, she simply can’t do it. The broker who provides the overhead and technology systems has little incentive to invest in expensive CRM systems and efforts, when the clients belong not to the company, but to her independent contractor agents. This is especially true when CRM requires more than just technology. Good CRM requires consistent business rules, a systemic approach to customer touchpoints, and data discipline that is entirely at odds with the independent contractor rules.

But the institutionalized brokerage built on the law firm model absolutely can do all of these.

Pooling of all resources, pooling of all revenues, and having only employees means that The Firm can deploy actual CRM in its practice.

The Firm can devote resources to the actual task of CRM — having a marketing or client services group or someone whose job it is to keep the firm front-of-mind for the customer. Because all clients belong to The Firm — with the understanding that the partner who brought the client in is the face of The Firm for that client — there is enormous incentive to invest in CRM systems. The Firm can invest the money required into automated CRM systems, such as Salesforce.com or even higher-end tools, that can help. Automating newsletters, remembering customer life events, and being able to segment the customers into distinct segments requiring different marketing messages (e.g., young couples, singles, elderly, hispanic vs. non-hispanic, etc. etc.) are enormous advantages.

Furthermore, as an institution that does not retire, and does not die, The Firm can keep up CRM efforts over the years in a way individuals simply cannot. The problem of the Irregular Customer is significantly lessened when knowledge isn’t kept in one person’s head, or on some agent’s Blackberry, but kept at the institution level, in institutional databases, with management and maintenance by dedicated CRM professionals.

The Firm can employ marketing professionals who analyze the CRM data to understand where to allocate marketing dollars for maximum impact. If the system shows that more first-time buyers are coming from Zillow.com than from Realtor.com, the Firm can reallocate its advertising spend to have greater impact among first-time buyers. At the same time, the data might show that the luxury property listings routinely spike after a charity fund raiser at the local country club — by all means, The Firm can spend more energy doing those.

This sort of advanced CRM is an institutional advantage unavailable to individual agents, and likely unavailable to traditional brokerages. The overhead is too high — it cannot be sustained, in my analysis, when you’re giving away the lion’s share of the revenues to the producing agents in the form of splits.

Conclusion

There is no silver bullet, of course, to the problems that the brokerage industry faces day in and day out. I do not claim that CRM by itself can suddenly make what does not appear viable (institutional brokerage) into a great business model. You cannot take a traditional brokerage, staple on some expensive CRM procedures, and turn your business around. CRM is far more transformative than that.

However, I do think CRM is one very important step towards viability of the institution model. It enables some of the other steps that must be taken before the concept can approach viability.

At the same time, I remain convinced that the industry as a whole is so obsessed with social marketing, blogs, and shiny new technology that we are missing the forest for the trees. CRM is old technology. It’s not Web 2.0; it’s not even Web 1.0. It predates the Internet.

But you know what? It is the killer app for Real Estate 2.0. Of that, I remain convinced.

In Part 3 of this series, we will turn to how institutionalizing and institutional CRM will enable the Firm to shift the very way that real estate companies compete with one another, thereby gaining further competitive advantage.

-rsh