2010 is so much more than just a new year. It is the beginning of a whole a new decade, a new national economy, a new American demographic, a new consumer culture and, for the American real estate industry, a whole new way of doing business. It will be a year in which: information will reign supreme, REALTORS® will be rated, consumers will control and real estate services will be redefined. It will be a year in which absolute attention to detail will represent the minimum standard, conversational knowledge of the global condition will earn a position in the race and a total lack of assumption and legacy thinking will merit a winning finish.
Over the past few months this column has discussed the role of profitability, accountability and consumer centricity moving forward onto this new brokerage landscape. This column will focus on a factor that will be universal to all of the above. We are focusing on risk, risk acceptance, risk avoidance, and risk management.
This column will have one thing in common with each of the others. Moving forward it is critical for brokers to appreciate and understand that the period of change that they have survived over the past several years has now produced a new wisdom. This is not to suggest that the industry’s institutional wisdom during the 2002 – 2009 period wasn’t appropriate. It does, however, call our attention to the fact that the net deliverable of this now eight year period of change, including pain and progress, is a whole new set of circumstances and precedence and, accordingly, a whole new set of rules regarding business policies and procedures.
Our inspiration for this column comes from the good folks at the Harvard University Business School. Harvard has recently produced a number of knowledge products, lectures, and publications addressing a new approach to risk in business. The stars of this show are Professors Kaplan, Mikes and Tufano. Each offer in-depth examinations of specific elements within the new study of risk.
This article will cut through to the big picture and offer six management tools that can get the real estate broker on the road to meeting the “new risk” challenge.
1. The Risk Management Officer (RMO)
In the traditional brokerage business model (TBBM) the only official and effective risk monitors were likely to be legal counsel and/or the financial auditor. This is not to suggest that the broker was not involved in looking for risk, but it does suggest that “management by wandering around” didn’t turn out to be an effective risk management tool. In most cases, risk was a condition that was discovered when a critical incident occurred, a suit was filed or a negative comment appeared on a periodic audit. In essence the discovery was made when it was too late for the broker to manage out of its consequences.
The contemporary approach to risk management includes the designation of a Risk Management Officer (RMO). In the majority of firms whose size will not allow for a dedicated individual, the RMO will be “another duty as required.” The benefit of designating a full-time or part-time function isn’t the designation so as much as the tools that go with the assignment. Most importantly, risk management now becomes an automated function with periodic reporting and testing, rather than something that happens when business is slow and other duties don’t beckon.
2. Risk Mapping
In the new world of risk, monitoring takes the place of early detection. Where the previous system was deemed successful when it discovered risk at an early stage, the new approach looks for circumstances or benchmarks that are likely to lead to risk. Jim Collin’s recent book “How the Mighty Fall” also provides a useful review of this concept. This new tool is called “risk mapping.” In its simplest format, the broker identifies each unique area of business and establishes a “risk profile” that, firstly, identifies probable risks and causes and, secondly, uses operational benchmarks to monitor business activity levels in order to determine when and where the risk situation might arise.
While a number of very sophisticated risk mapping models exist, perhaps the simplest one can be found in how a NASCAR race team monitors drivers, cars and track conditions during the race to project when the probable risk factor moves beyond the risk acceptance performance mark.
3. Benchmark Trending (instead of extreme events)
As indicated above, the RMO will be searching operational data in order to determine the probability of risk, rather than trying to predict extreme events. In some cases this management technique will result in adjusting company behaviors to avoid the risk. In others, the risk will be allowed to occur, but the firm will be prepared to take actions to sharply avoid the full consequences of the risk.
4. Statistical Analysis (over a reliance on history)
Traditional risk management practices relied heavily on spotting similar historic situations and then predicting that the same result would occur. The reality of today’s rapidly changing business environment is that there is, generally, a whole new set of circumstances in play and the chance of the same risk outcome occuring is quite rare. Perhaps unfortunately, perhaps not, this is yet another example of the new reality in which past experiences are not necessarily beneficial to current operations because not enough of the circumstances of the two events are similar or even related. While industry experience will remain valuable in the management mix, it will not be as important as ‘out of the box’ thinking and benchmark analysis – a bad omen for the boomer generation executive but great news for the up and coming X and Y generation “Technofused benchmark junkie.”
5. Focus on What to Do (rather than what not to do)
The historic evidence suggests that too many risk managers focused their attention on what shouldn’t be done, rather than what could be done to reach the firm’s objectives. Success in risk management, moving forward, will not be measured by a lack of critical events but rather how close the firm comes to reaching its goals and objectives without having a critical event. This is the alternative opportunity theory that will place a bull’s eye on the foreheads of the classic corporate legal counsel whose advice sought to keep clients far away from risk, even if that meant far away from success.
6. Incorporate redundancy that wins out over economy.
The new real estate brokerage business model will run at a significantly higher “RMM” (Risk Measurement and Management) level than its predecessor. It will incorporate many more “risk generation” points. The success of risk management will not be measured on the basis of critical events, but rather on how prepared one is to face the possibility of negative social media comments. Overall, this will result in a much faster flow of events. In the traditional system, risk management involved keeping the firm’s operations away from risk. The new system will focus on accepting the risk that supports the firm’s goals and objectives, but providing many more instant solution resources when a risk event occurs or draws close. Redundancy will be a critical design factor within this environment.
These then are some of the issues, features and performance characteristics of risk management in 2010. The prescription is simple. Read the current literature, identify who is going to play what role, align the firm’s risk management program with the upside rather than the downside and, finally, use redundancy in tandem with a more aggressive “win win” approach.
We can do this, why wouldn’t we?
