Archive for January, 2011

Part III: "Failure is not an option."

Posted January 31, 2011 By Fletcher Groves

(excerpted from The Pipeline)

“This is the direction in which RB Builders is headed”, said the CEO, “and your choice to continue your cynicism has a life expectancy of about 30 more seconds.”

The intrepid, results-based consultant looked over at the senior superintendent, shrugged, and said, “Now, that – that was a speech.

“I do agree with your point”, she said, turning her attention back to the CEO. “But, you know, it is possible to fail, without being the least bit cynical about its prospects. I would say this: Whether you are cynical or not, change is up to you. Whether any of this works or not, is up to each of you individually, all of you collectively.

“If I did not believe RB Builders would make it work, I would not be here, my firm would not accept you as a client. We would not waste our time. After all, my firm and I have a bigger dog in this fight than anyone else.

“When we started out on this little adventure, I told you that my consulting firm would be compensated on the same performance basis as everyone else”, she reminded them. “I told you that there was no limit to the time and effort my firm – and I personally – would expend to achieve the outcomes we targeted together. I told you that I would work hand-in-hand with you, and do whatever it takes to achieve those goals. I assured you that I would do whatever it took to foster a willingness and capacity for change, create a sustainable capability for implementing the things that would continuously improve operating performance and business outcomes, increase innovation and learning, and make you less dependent on all of your consultants. I told you, from the standpoint of how the credit was attributed, that I was content to remain in the background.

“Those were the assurances I gave you”, she said. “In return, I sought and received assurances from you.

“You agreed that this was a true client-consultant partnership, and that – because my firm’s compensation was completely results-based, of finite duration, and self-funding – my firm was assuming the higher level of risk. You agreed that this new, results-focused consulting arrangement we were jointly undertaking provided ample incentive to everyone for taking action, making changes, and improving operating performance and business outcomes.

“I told you that I was as serious as a heart attack about getting results. I made it clear that I had no intention of wasting my firm’s time and effort. I told you that you did not have to do everything I told you, but that you did have to come to terms with me, take action, make needed changes, and do whatever it took to achieve the targeted results. Although I have grown rather fond of most of you, I made it clear that, if there was no action, no change, no results, then – out of principle alone – heads needed to roll.

“A couple of stories.

“My younger sister played NCAA Division II soccer in college. As a junior and senior, she was her team’s captain, so, her junior year, before the season began, a reporter asked for her prediction about the season, specifically, what kind of W-L record she thought her team would have, as a measure of success.

“My sister replied: “I don’t plan to lose any games”.”

“When my dad was younger, he sailed a lot of offshore races. According to him, it would get dangerous, sailing offshore at night, in rough seas. He says that they all used to remind each other, only half-jokingly, I think, that – where they were – if their boat went down, no one was going to blame them if they drowned.

“But – they knew they would still be dead, if they just sat there.

“Trust me, no one outside of RB Builders cares whether you succeed or not. No one else cares whether you separate yourselves from your competition. No one else cares whether you keep your jobs. Nobody else cares about your livelihood or your future. Nothing new in that revelation. Back in the “Age of Homebuilder Entitlement”, nobody cared, either. It was just never an issue, because being good enough was good enough. Success is no longer such a foregone conclusion. No one cares, but no one is going to blame you.

“But – that does not change the outcome.

“I can just hear it now”, said the intrepid, results-based consultant. “Poor things. What a great company RB Builders could have been. It was all just too much for them to handle, housing’s version of The Apocalypse. But, it is not their fault.

“Nope. Nobody is going to blame you, if you go out of business. But, that is just what you will be – out of business.

“Failure is not an option. Not for me. Not for any of you.”

 

(excerpted from The Pipeline)

“I am the one who is saying it, but plenty of us are thinking it. This approach has merit, but it does not mean that it will work here, not the way this company has operated in the past”, the superintendent said. “So, I want you to tell me how this is going to be different. I want you to tell me how this is going to work, now, in this company.”

“Your concern – your issue – has nothing to do with production principles, or with production systems”, said the intrepid, results-based consultant.

” . . . your issue has nothing to do with production principles. Profound, as always”, said the CEO. “Clearly, it is more foundational than that. This is about giving teammates a reason to care, and about inspiring the confidence to follow where we are leading this company.

“So, one point at a time.

“Regarding your first point, the steps we have already taken to create business savvy-ness, to impart decision-making accountability and responsibility, and to provide a real financial stake in the business outcome are radical by industry standards. Collectively, they give all of us – and I mean all of us – reason to care deeply about improving the operating performance that drives that business outcome.

“Secondly, in terms of inspiring the confidence to follow, some of us are charged with an official responsibility of leadership, by virtue of our management positions in the company. Fair enough. I think that the leaders of an enterprise are there to serve, not be served. But, leadership is not fundamentally about the position that you hold, or do not hold. The way I choose to describe leadership, it is a matter of personal character and courage. It is about the credibility that flows from demonstrating integrity.

“It comes from trusting one another. It means sticking to agreements and keeping commitments. It means going beyond the expectations and responsibilities of your individual job. But, it also means speaking and hearing the truth. Expressing candor, like this”, he said, nodding to the senior superintendent, “comes with the territory.

“It means pursuing goals that are worth pursuing, even if they are difficult to achieve. No. I will re-phrase that. It means pursuing goals that are worth pursuing, precisely because they are difficult to achieve.

“It comes from inspiring the type of optimism that sees every situation as we choose to make it, not as we are told it must be. Or, how some long-standing, so-called industry experts tell us it should be, if we were willing to settle for so-called industry best practices. Somehow, I just do not see industry best practice guidelines as the path to competitive separation. The assessment of current reality that underlies everything? That is where we are. The production principles we have instituted? Vetted, to get us to where we want to go. Team-based performance compensation? The focus on Gross Income? Same thing.

“This is the direction in which RB Builders is headed.

“For whatever reason in the past, such an understanding of leadership has been absent. At best, it has been an obligation and a title, for some, and an excuse for everyone else. It is a situation that predates me, but it is a situation that stops with me. Repairing the damage will not happen overnight. That is the thing with integrity and credibility. It is difficult to build and it is really easy to destroy. But – the situation is going to change, that I promise you.

“Based on past performance, I will not argue with your conclusion”, said the CEO. “Nor will I blame you for being – as you put it – skeptical-bordering-on-cynical, about the prospect for change, the approach to production management we are committed to, or the requisite leadership I have just explained. The right amount of skepticism can be healthy; the possibility for pessimism is always there, but it has to be overcome, if anything worthwhile is to happen. But – I am going to make this clear, to all of you, to all of us – cynicism is pointless. Get over it.

“This is the direction in which RB Builders is headed, and your choice to continue your cynicism has a life expectancy of about 30 more seconds.”

 

Part I: Push-Back

Posted January 17, 2011 By Fletcher Groves

(excerpted from The Pipeline)

“May I say something?”

The question came from RB Builders’ most experienced, capable, and respected superintendent, someone not known for his excess commentary. The conference room grew respectfully silent. And expectant.

“Sure”, replied the CEO. “Speak your mind.”

“Nice speech.”

The superintendent continued.

“When I first heard about this arrangement”, he said, “it made me want to throw up. What was it? Oh, I remember: Partnering and learning, participating in the financial outcome with a consulting firm on a series of projects with short timeframes and targeted, focused results, in pursuit of an overall company goal.”

“Really?

“This stuff is intriguing, even the idea of some type of team-based performance compensation. However – that is as far as I would ever let it go. In terms of expectations regarding the outcome, I have always been skeptical, bordering on cynical.

“I still am.

“This sounds just like every other program the company has embarked on in recent years. None of them have worked, either, not the way they were supposed to. Over-promised? Badly-executed? Focused on the wrong thing? Not for me to say, but I doubt that this program will be any different. Like the rest, it will just take up a lot of our time, sitting in meetings like this, that ultimately lead nowhere.

“What was it that was said? “Think globally, act locally”? I like the second half of that statement.

“My response to this stuff has been to put my head down and do my job. I have become good at doing that. As far as I have been concerned, this company consists of my job, nothing more. I have relationships, but that is not about my work. That is about friends and associates. I have argued in favor of individual performance compensation, not because I disliked team-based performance compensation, rather, because I knew I could achieve the performance that triggered the individual bonus, without having to depend on anyone or anything else.

“Give me a cycle time to achieve, and I will achieve it. Give me a quality standard to meet, and I will meet it. It does not matter what others do, it does not matter what RB Builders does. I get my job done, and I get myself paid. I am not willing to sacrifice what I know I can do personally, for what I do not believe we can do as a team.

“As for my job, I know what it takes to do it. You can have the rest of it. I do not need it. I could care less about production systems.

“I am the production system.

“My problem is not that I think this new stuff is the wrong approach. To the contrary, it makes compelling sense to me. It is the way we should be doing it. My problem is that this approach is bound to fight a losing battle against what I consider to be a pervasive attitude of complacency, entitlement, laziness, and resignation. All of you so-called leaders – those of you taking down the six-figure salaries and failing to produce results? Well – it leaves me a little cold.

“RB Builders is a pretty good company, actually one of the better homebuilding companies to work for. But – its management has historically lacked the willingness, capacity, and capability to change. Management says it has vision. It does not know what it sees. All we ever wind up doing is tying ourselves into knots, all the while declaring the latest change we need to make.

“In the end, my skepticism wins out. I am simply not going to be stupid enough to risk my own performance compensation on something in which I have no confidence.”

The superintendent looked directly at the CEO. “In the past, it did not matter. But – like you – I do not think average performance defined by so-called industry best practices is going to cut it any longer.

“I commend you, and her”, he said, pointing to the intrepid, results-based consultant, “for putting it out there. There is a lot that this new approach gets right. Regardless of what we choose to call it – an analogy, a concept, a visual reference, whatever – I do think our production system is a pipeline. I do think we need to understand the connection between the decisions we make every day and the business outcomes that protect our livelihood. I do think we should focus on optimizing the performance of the overall system, instead of the performance of its individual parts. I agree that there is a distinction between processes and projects, between process management and project management, and that we need to understand both.

“And – I hate to admit it – there is a part of me that wants to be part of something that is bigger and more important than me. We have talked about the need for a savvy, accountable, and motivated homebuilding team, comprised of savvy, accountable, and motivated teammates. I want to base my work on the “want-to” attitude that it takes to own and run a homebuilding business, not just the “how-to” mechanics of selling, starting, and building houses. I want to share accountability and responsibility for the decisions and the results. And – yes – I want to have a serious financial stake in the outcome. I want to be in the business of homebuilding, not just work in a homebuilding business.

“Wishful thinking about RB Builders does not erase the past. It does not dissuade my concern that this company lacks the willingness and capability to enact these changes.

“I am the one who is saying it, but plenty of us are thinking it. This approach has merit, but it does not mean that it will work here, not the way this company has operated in the past. So, I want you to tell me how this is going to be different. I want you to tell me how this is going to work, now, in this company.”

 

The Road That Lies Ahead . . . and The Road Less Traveled.

Posted January 4, 2011 By Fletcher Groves

“Where is the homebuilding industry headed over the next five to ten years on the issues of growth, consolidation, and supply chain management?”

Actually, not a current set of questions. At the dawn of this century, Mike Hollister and I posed these and other questions in a volume of Reference Point, our then-periodic study of management practices in the homebuilding industry, conducted among the senior management of a select group of large building companies.

At the time, Mike and I were doing consulting work with Fortress Group, which is probably another story worth telling, someday.

Anyway, 11 years later, as we wait for the inevitable assertion of power – the imposition of will – that will finally herald the dawn of the Era of Consolidation, when the publicly-held homebuilding companies that survive the Great Homebuilding Recession get serious about consolidation, and take over the industry, I thought it might be worthwhile to look back and to summarize some of what builders told us then, and how we observed and commented on those findings:

GROWTH STRATEGIES:

” . . . almost three-fourths (71%) of these executives predict that their own building operations will become “much larger”; almost everyone else (27%) predicts that their operations will remain about the same size . . . overall, these findings are very consistent with the findings from [one of our previous studies].”

“We thought it would be interesting to see how all of this growth is going to materialize. When we asked these executives what primary strategy they will use to meet their growth projections, 41% identified “geographic expansion into new markets”, and 39% selected “higher market share in current markets and buyer segments”. The remaining 21% identified “new market share in additional buyer segments”; not a single [executive we surveyed] identified “vertical integration” – a decision to supply more of the component parts themselves – as a primary strategy.”

CONSOLIDATION:

“At separate points in the study, we asked two questions designed to determine the extent to which industry consolidation – some combination of growth, merger, and acquisition – will reduce the number of active building companies in the years ahead.”

“Our first question: Long term (10 years +), could they foresee the type of widespread consolidation that has already occurred in other industries? Overall, more than 70% of these executives said they [could] foresee the circumstances for such a consolidation.”

“We then asked these senior managers whether they thought the number of homebuilding operations in their markets would increase or decrease in the next five to seven years. Overall, almost half (49%) think there will be fewer building companies, while more than one-third (38%) think the number of building companies will remain about the same; about one-in-ten (13%) believe the number of builders will actually increase.”

“Their responses differ in significant respects from those expressed [in our previous studies] . . . at that time, less than one-in-ten (9%) thought there would be a significant decline in the number of builders . . . for those who thought there would be an increase . . . the situation has been reversed.”

NOTE: Let’s see. Seven-in-ten thought their own companies would be “much larger”, but more than half thought the number of building companies in their markets would either increase or remain the same. Hmmm.

SUPPLY CHAIN MANAGEMENT:

“We finished by asking two questions related to distribution channels and supply chain management. We wanted to know whether builders view these two issues – closely related to change in many other industries – as something the homebuilding industry will need to address within the next ten years.”

“Asked whether they could foresee . . . changes [that could include] the circumvention of established delivery systems similar to what has occurred in other industries . . . a slight majority (54%) believes the industry will have to deal with this issue in the next ten years; the rest do not see this as an important issue.”

“On the matter of supply chain management, [there was] much stronger agreement. Asked whether they could foresee homebuilding companies taking the lead in collaborating . . . to manage all of the activities in the process of creating the housing product . . . an overwhelming majority (80%) expect the industry to move in that direction.”

We then offered the following comments and observations:

“The Road Less Traveled”

“Even if builders choose to reject the notion of widespread consolidation and outright circumvention of established delivery systems, and dismiss the level of growth projected by such a high percentage of builders as collective boardroom fantasy, the dependence of so many builders on growth strategies aimed at geographic expansion and higher market share in current buyer segments ought to raise a couple of red flags:

“[First], assuming that a strategy based on expansion into new geographic markets represents real growth, and not just the transfer of demand through acquisition or merger, then it will have the effect of forcing more competition on the existing level of demand. The first victims will be the builders that cannot compete for the available lots. But, then what? How will the builders that survive assert themselves in the market? Price? Product Quality? Customization?”

“[Second], a strategy based on capturing a higher share of the market in current buyer segments asks a more naked version of the same question – how do builders acquire more business – in the same buyer segment, in the same geographic market? Can those types of gains be sustained?”

“Growth fueled by a strategy of geographic expansion and higher market share in current buyer segments is essentially a strip-mining operation – an attempt to create value out of something a mile wide and an inch deep. But what choice do builders have? As an industry, we have outsourced almost every value-added activity in the building process.”

“Moreover, we can talk all day long about the need to increase productivity, but, first, that is a difficult proposition when someone else is doing all the work, and, second, there is no real point in improving productivity unless a productive use can be found for the additional capacity. And, besides, just where will all that additional production capacity be invested? In more expansion? In higher market share?”

“When we look at it in these terms, there has to be a better way.”

So, today, I suppose that Antoine Dodson would put it this way: “Well, obviously, we have large, publicly-held homebuilding companies in your area. They’re climbing in your communities, they’re snatching your business up. So, hide the lots, hide the buyers, hide the banks. And, hide your employees, too, because they’re buyin’ everybody up around here.”

Well, obviously . . . a degree of consolidation has occurred in the homebuilding industry, and that merger and acquisition activity had occurred, has occurred, before and after this edition of Reference Point, 11 years ago. But, consolidation on a massive scale is still not a bet that I would necessarily take.

There is evidence against the inevitability of that outcome, despite the fact that it resonates in almost every other industry vertical. There are plenty of reasons why large-scale, industry-revolutionizing consolidation in homebuilding has not happened, and those reasons remain the obstacles and challenges that would prevent it from ever happening. And, those obstacles and challenges – some which are self-imposed – remain the subject for more discussion.

Not saying that it cannot happen. Just questioning whether it ever will.