Sometimes you’ll hear attorneys and businesses talk about “risk management.” The concept, at the core level, is rather straightforward. You are supposed to manage your risk. Simple as that. When you really break it down, though, risk is a vague thing, and it’s very difficult to manage risk without knowing what all you should be concerned about.
There are many types of risk, but for our purposes, let’s break it down into 5 categories:
Reputational Risk – damage or loss to the business/individual’s reputation and goodwill. It impacts trust, consumer behavior, and the financial security of the organization. Impacts to trust and consumer behavior can result in substantial downstream impacts to future business and referrals.
Operational Risk – damage or loss stemming from failed internal processes, people, and systems. Things like employee errors, fraud, failures of training, flawed procedures, failed quality controls, and data breaches [which tend to be from failures of training and/or flawed procedures].
Financial Risk – risk or probability of losing money or encountering further risk from lack of finances. Examples include defaulting on debt, cash and liquidity issues, and market risk [which you tend to have limited control over outside diversifying your position].
Legal Risk – Risk of loss or damage resulting from violations of law or contract. Legal risk can stem from poor contracting, poor review, inability to parse through regulatory red tape, cost of litigation, etc. Some legal risk is unavoidable [e.g., risk of lawsuit can arise even when fully compliant with law and rule], but the probability of risk can be mitigated.
Strategic Risk – Risk or loss caused by failure to meet primary business objectives, oftentimes interrelated with reputational risk. Failure to mitigate or remedy strategic risks can result in substantial loss of membership and downstream reputational harm.
Every decision you make balances reward against these risks. Choosing to advertise your brokerage with a billboard may net you a number of clients, but if the advertisement has a typo, it could impact your reputation. Hiring an office worker to assist with administrative tasks can speed your processes and improve profitability, but carries new training, benefits, and legal risks. The value of compartmentalizing types of risk is that it lets you address the concern head-on in manageable portions. It requires you to essentially wrestle with the pros and cons of a decision.
Take a basic example – you have a client who, the day before closing, refuses to respond to your messages and closes without you, using their friend who is a real estate licensee. You are reasonably upset and have a choice to make: do you sue for the commission you rightly earned?
Reputational risk – you could become known as a person who sues clients and will certainly never get a referral from the sued client in the future. The fact that another broker is involved means the lawsuit may become known to your peers and could impact other referrals. Depending on how upset you are, how much money is at stake, and how much work you sank into this client already, these may not be substantial issues.
Operational risk – If you sue the client, you may have to spend dozens of hours away from the office jockeying legal arguments and court dates. If you’re the only person supervising and controlling the office, the time cost could impact your brokerage in unforeseen ways. If you have other brokers controlling the office, it may have a slight impact. Alternatively, you can hire an attorney to handle the lawsuit, but that comes at a financial cost added to the process.
Financial risk – At the end of the day, you’re suing over a commission. That number is the amount you stand to gain. On the other hand, you may have costs from hiring an attorney, document prep costs, etc. The number you are trying to get will rarely be what you receive.
Legal risk – every lawsuit is a risk. Depending on what happened throughout the transaction, your claim to the commission could be strong or it could be weak. If you had actively ignored the client during critical moments of the transaction, you may not be able to say “I earned that commission,” and suing over it won’t change that outcome.
Strategic risk – If your goal is to become the top-producing agent in your brokerage, or to make 20 sales this year, you may not be able to accomplish that goal if you’re bogged down in a trial for 3 months. Never lose sight of the greater war while fighting your individual battles.
The above thought experiment is largely designed to show that the decision to do something like suing over a commission you feel you rightfully earned is never a riskless action.