Since the deep global financial crisis experienced in 2008, the majority of professional firms have shown that they have a business model that is resilient to changes in the economy and can be flexible – adapting to changing levels of demand for their client services. Most firms have had to adapt to new ways of working and be able to respond to a rapidly changing market. The real estate advisory sector has been able to benefit from increased revenues and profits as a result.
However, despite the changes that firms have made and the increased profitability, the process is not yet complete. There is no shortage of ongoing and new challenges that firms need to deal with. As they consider the next few years through to 2020, planning ahead and being able to respond to these challenges will be key.
Good to great
It is important to emphasise that incremental gains can often be made in professional firms where there is a relentless search for better ways of doing things. Professional firms have the ability to attract some of the best people. “Get the right people on the bus, the wrong people off the bus, and the right people in the right seats” is the memorable quote from Jim Collins’ book Good To Great. His research outlined how a number of “good” companies can develop into “great” companies.
Focusing on people and culture is probably the single most important factor in a professional firm for achieving great success – start with getting the right people and then also ensure that the culture of the firm empowers them to develop and achieve great results.
These incremental changes should lead to increased profitability and there is certainly a noticeable shift, with more focus on profit growth rather than just the top line. I have also seen instances of firms being more willing to shed less profitable clients or to be able to service instructions using a mix of low-cost jurisdictions or lower-cost less-qualified employees.
Technology and cyber security
Technology continues to have an important role to play in firms – both in providing the infrastructure and platforms on which the firm operates, but also in enabling professionals to deliver the right service to clients. For many firms, technology will be playing an even bigger role over the next few years. Making the right investments is critical, and those firms that are able to do so could either deliver a superior level of services to clients, or the same services but at reduced cost. Standing still and continuing to deliver the same service in the same way is just not an option in the current market – firms that do not make the right investment in new technology run a serious risk of being left behind.
Closely linked, but a separate topic, is cyber security – which remains one of the key risks facing boards of real estate advisors. When a significant cyber-attack succeeds, the implications can be long lasting and hugely damaging.
If you evaluate the war stories in the public domain and the threat intelligence sources that we have access to, the attacks are becoming more sophisticated and the motivations are changing. Stealing high-value data remains a key motivator for cyber criminals. Typically they target personal identifiable data to help with identity theft or intellectual property to create competitive advantage or sell on to other parties.
Socially engineered attacks are also increasing in volume and sophistication. With social media and other publicly available information, cyber criminals are now able to build a picture of an organisation and its key stakeholders. This creates insight which can be exploited to disguise attacks in a variety of ways – for example, a recent case involved an attack on the computer being used by a board member’s daughter. Once this weak point was attacked, the criminal observed the interactions with her family to identify an opportunity to introduce a virus onto the board member’s work computer and then into the network of the organisation.
The latest type of cybercrime is a “sabotage and ransom attack”. This is now seen as a significant threat, with business operations and customer interactions becoming more IT-dependent. Once security is breached, the criminal will hide undetected on the IT infrastructure and build an understanding of the vulnerabilities and scenarios to exploit. By deploying software, critical parts of the IT environment will be disabled and encrypted. The cybercriminal is then well placed to instigate the ransom demand to create the “doomsday scenario” – pay the demand or incur the cost for every hour that the IT environment is unavailable.
The consequences are also changing. The adverse reputational impact of course remains significant. However, the regulatory sanctions of data loss are also increasing with the new European Data Protection Regulations increasing the penalty ceiling from £500,000 to 5% of global revenue or €100m, whichever is lower.
Leadership and governance
Dealing with all these challenges requires effective management or leadership teams that bring together the right people with the right skillsets to make the necessary decisions and carry out the actions to execute the strategy. Alongside this there should be the right level of governance. This is an area that many firms have paid more attention to over the past few years and been able to enhance with the use of non-executive directors, clarity between roles on the board and, where appropriate, using effective audit and remuneration committees to provide additional oversight. However, getting the balance right is important, such that there is good governance but not so unwieldy that it hinders the organisation in the pursuit of its goals.
Having strong clarity of vision is crucial. When the vision is clear and properly communicated it will ensure that the people, systems and organisation are all aligned in pursuit of the firm’s strategy for the next few years.
Nick Carter-Pegg is a partner and head of professional services at BDO LLP
