Archive for February, 2009

Making performance compensation live up to its name

Posted February 16, 2009 By Fletcher Groves

Reference Point is our periodic survey of management practices conducted with homebuilding companies listed on Professional Builder’s Survey of Housing Giants. Ten years ago, we asked the senior management of these companies to respond to a series of statements intended to measure the context of business logic they attempted to infuse into their operations.

On a scale of one to ten, they scored a four.

Our conclusion was then, and is now, that the efforts of a homebuilding company to improve operating performance and business outcomes will largely fail, if it does not somehow succeed first in creating a homebuilding team that works toward commonly-held and commonly understood business goals, versus merely being a collection of so-called “teammates” working toward individual goals. What is missing, is an underlying business logic that forms the necessary context for understanding everything else.

To become the kind of savvy, accountable, and motivated homebuilding team that is required to compete effectively in the business world, everyone on the team has to learn the “business” of homebuilding, they have to understand their individual responsibilities as part of the overall team, and they have to understand what is at stake, individually and collectively.

Moreover, it is not enough that teammates merely understand the business outcome that is at stake, they must have a stake in that business outcome. That is the role of performance compensation.

What attributes should a good performance compensation plan have?

It should be simple. It should be visible and transparent. It should be compelling. It should bonus on a single business outcome, not an operating outcome. It should pay bonuses fast and frequently. It should be self-funding, meaning that the bonuses must pay for themselves out of the additional income that the company produces over and above the baseline plan (the one where everyone justifies their salaries and gets to keep their job). It should represent a very significant portion of the compensation of every teammate. It should include every single employee in the company. It should provide only for the possibility of winners or losers, not winners and losers. It should give managers the right to lead and to demand results.

Who has the P&L responsibility in your company? The answer needs to be, “Everyone”.

Narrow your focus

Posted February 10, 2009 By Fletcher Groves

“In many ways, RB Builders was . . . just another homebuilding company . . . with a middle-of-the-road approach to delivering the value its homebuyers demanded . . . locked into an operating model – into organizational structures, management systems, processes, cultures, and employees – that could not deliver extraordinary levels of distinctive value . . . indistinguishable from other builders, and unable to create any type of competitive advantage . . . “

There are two sets of questions that lie at the heart of what a homebuilding company does, and therefore, what a homebuilding company is. The first set of questions is about the value buyers want. What band of the value spectrum do your buyers really want, and want so much they are willing to pay for it? Upon what combination of price, product attribute, and personal attention will they base their buying decision?

The second set of questions is about how the homebuilding company that you own, manage, or work for delivers that value. Can your company deliver extraordinarily and distinctive levels of that specific value with its current operating model? By operating model, I mean processes, organizational structure, management systems, even the type of employees you have, and the culture you promote.

You can make it as complicated as you choose, but, fundamentally, there are only three value propositions you can offer homebuyers on which they will base their buying decision. You can promise them the best comparable price (“Best Price”). You can promise them the best location, best design, or best quality, regardless of price (“Best Product”). Or, you can promise to meet their individual and particular (sometimes unique) requirements for both product and homebuying experience (“Best Solution”).

Value is defined by homebuyers. While most of their decisions are a combination of all three factors, they do not assign them equal value. One of the factors tends to be the most influential and it trumps all of the others in the buying decision. Homebuyers do not demand equal levels of price, product attribute, and service. Yes, they would like to have extraordinary levels of value in all three, but they will demand – they will choose – to have extraordinary levels of value in one component over the other two.

On the other hand, that value is produced by you. Most homebuilders tend to see themselves from two perspectives, neither of which enable them to provide the extraordinary level of distinctive value their buyers require. First, they see themselves as “all things to all people”, capable of meeting different bands of the value spectrum equally well. Second, they also tend to see the capabilities of their own operating model as no better than the average homebuilder.

Selecting the value at which to excel is a strategic decision. It requires focus, and that focus requires a choice about the component of value. The offer of value must choose one component over the other two. At the same time, the offer of the chosen component of value cannot ignore the threshold requirements that must be met for the components of value that were not chosen. It is a question of emphasis, not exclusion. The offer cannot focus on one component to the complete exclusion of the other components. If the value delivered in the other two components falls below the threshold, the customer will reject it and go somewhere else.

The choice of a value proposition – and the choice of an operating model that delivers it – breaks out on both geographic market and product segments. You can slice it any way you choose, but, at the end of the day, within every market and product segment, there is only room for two or three homebuilders to effectively compete. The rest are superfluous, irrelevant, unnecessary – and unable to compete.

So – you better narrow your focus.

The antidote to average-ness

Posted February 3, 2009 By Fletcher Groves

In the Lean World, the term “sensei” connotes the idea of wise counsel. My buddy Pascal Dennis would no doubt have a more authentic and appropriate term, but both of us would probably agree that serving the homebuilding industry can feel less like a sensei and more like being a voice in the wilderness. Qualifying as a true VITW would seem to require that you endure at least 10 years of frustration. On that basis, I could certainly qualify.

If I have learned anything over the years, it is to reduce things – problems, solutions, challenges, opportunities – to their essence. It was not always so. Ten years ago, when SAI was just beginning its work in helping homebuilding companies to understand and improve their business processes, I characterized the effort to achieve and sustain improvements in business performance as involving “a certain chemistry – a complexity and a comprehensiveness”, and, for that reason, “improving performance tends to be hard, involved work.” I went on to say that, “It is hard work because performance cannot be improved without doing things differently, and change is threatening to most people; it is involved work because improving performance requires more than a simple, one-dimensional approach – it requires a continuous effort on more than one front.”

In retrospect, I do think it is hard, involved work, but not because it is complex. Even at the time I was saying how complex it was, I was also saying that “it seems to us that business performance improvement really boils down to getting the job done – viewing the issue, sustaining the effort, and getting the results – in three critical dimensions.”

I would substitute “focused” for “complex”, but I would also say that those three dimensions are as true and relevant today as they were 10 years ago. For a homebuilding company, improving operating performance and business outcomes still comes down to having a strategic and marketing discipline, creating a business context in which everything makes sense, and having a perspective toward how value is created.

Discipline: It has to narrow its focus, by designing its operating model to deliver exceptional levels of the specific and distinctive value demanded by a narrowly defined segment of homebuyers.

Context: It has to be a company of business-people. A savvy, accountable, and motivated homebuilding team comprised of savvy, accountable, and motivated teammates. It must teach its employees the real numbers of the business, give them the authority – and responsibility – to act on that knowledge, and then give them a real stake in the financial outcome.

Perspective: It has to organize and focus its efforts around the systemic manner in which it performs work and creates value for its buyers. Sometimes it is about process management. Sometimes it is about project management. Sometimes it is about solving problems, and sometimes it is about managing constraints. It is always about understanding the cause-and-effect nature of the system in which it operates.

Everything else is just a means to an end.