Archive for June, 2011

Apocalypse Now: Is a Shattered Industry What It Takes??

Posted June 29, 2011 By Fletcher Groves

NOTE: We published the original version of this post on June 24, 2009, two years ago, almost to the day.

Everyone likes to talk about the “green shoots” that appear and disappear in the housing market and in the homebuilding industry, as the hopeful evidence for a return to business-as-usual. I think the worst Residential Fixed Investment disaster in three generations should count for more than a return to business-as-usual.

If we are going to pay this steep a price, why not just blow up the dysfunctional business model of production homebuilding?

It is a solution that has undoubtedly crossed the minds of those of us who understand Lean Production and the Toyota Production System, understand constraint management and Critical Chain Project Management, understand Six Sigma and the effect of variation, understand production physics, understand business and finance.

Crossed the minds of those of us who stare across the chasm, and roll our eyes at what we see.

Custom homebuilding gets a pass. The building of one-off or highly-individualized homes could benefit from the selective use of the tools in the toolbox, but custom homebuilding is a separate, specialized value stream. It is a separate culture.

So, what is our vision of a post-apocalyptic homebuilding industry? To cite a few:

— One in which the deal-driven mentality that pervades the industry is at least relegated to the land side of the business, and is replaced with a much more disciplined, process-centric approach to production homebuilding.

— One in which the constant question is: Does this create value? And, the decisions are based on the outcome.

— One in which homebuilders achieve 6:1 Inventory Turns, and the debate about build-to-order (presale) versus build-to-forecast (inventory or spec) becomes a moot point in the face of 60 day cycle times.

— One in which homebuilding companies need negligible working capital for production operations, and one in which cash on the Balance Sheet is not the defining competitive advantage of large, public homebuilding companies.

— One in which homebuilding companies do not strip-mine the value stream by outsourcing 90% of the work, with all of the attendant duplication in overhead and difficulty in coordinating schedules and resources; one in which, instead, homebuilding companies actually build the houses.

— One which understands that a homebuilding company is first and foremost a project portfolio organization.

— One in which geographic expansion and increased market share is not the only models for growth.

– One on which the absurd cost approach used in the NAHB Chart of Accounts Income Statement is changed, so that homebuilders can actually use the information that it provides to make decisions. Small, inconsequential decisions, like determining community contribution, breakeven and the cost of production capacity.

— One in which a preoccupation with “Industry Best Practices” is recognized as the self-limitation that it is.

— One in which agility and speed counts for more than size. One in which a savvy, accountable, and motivated homebuilding team trumps an executive committee.

— One in which the mental model is “More-for-Less”, not “More-for-More” or “Less-for-Less”.

The Song Remains The Same.

Back in September, I had a call from a former executive of one of my clients, who wanted to talk about sales, which, as I said at the time, was interesting, because the consulting practice at SAI does not deal with sales, and because I did not think this guy could sell anything. In fact, he could not sell footballs to the NFL.

His story was about a sales turnaround. At the end of May 2010, seven months into his new community, five months into his budget year, he was already six sales behind budget, and the situation was getting progressively worse; at the time, they were four sales behind budget in just the last past three months, Traffic counts had improved, doubled, in fact, but the conversion rate (percent) had fallen from the 10% to 16% range to the 3% to 6% range.

In the next three months (June, July, August 2010), they sold 16 homes, one above budget. Compared with the previous three months, sales were up 150%, traffic was up 100%, and the conversion percentage rose from 4.7% to 7.7%, a 65% improvement.

And, of course, he had wanted to tell me why.

As it turned out, there were several factors involved in the turnaround, but – the most important decision – had been to take one specific element of a team-based performance compensation this manager had learned at our client, and apply it to resolving the specific constraint that he faced: Insufficient sales.

He and his sales manager had hired additional sales agents, but they had also taken the commission/draw arrangement and converted it to a base salary with a team-based commission arrangement, so that sales agents received a base salary and shared equally in a commission pool on all sales, versus the previous straight individual commission and reimbursed draw. They had also instituted a new, flat, monthly cash bonus, for every sales agent, paid in any month where the team sold more than five homes (the 2010 budget had called for three sales per month).

At the time, here is what he had said:

“In addition to the obvious results, the culture of the team was elevated to that of a pre-recession environment. The team is excited to come to work. They work together. Every day, they discuss where they are in relation to their targets and work together to constantly strategize how they are going to reach their goal as a team.

“I underestimated the impact this [compensation change] would have on the culture of the work environment. We had reduced the overall sales compensation line item in the proforma. We spent less, we paid out less. But, with the base salary (which relieved a lot of pressure in this difficult economic time), and with the new and improved team environment, we had overwhelmingly changed the culture and made it a better place to work.”

At the time, my own observations had been: One – the improvement had nothing to do with the homebuyer tax credit. Two – it broke a lot of rules. Three – it was a lesson about the effectiveness of changing a paradigm for how to compensate sales agents, and about using that change to break the external (market) constraint that limited the ability of this project to make money. And, now, I will add a fourth observation: The objective had nothing to do with spending less or paying out less.

In a larger, more important sense, I said, this had been a call to challenge the status quo, to challenge the accepted way of doing everything. It had been a warning not to settle for “industry best practices”. It had been a call to not be afraid of being different, in the quest for being exceptional. It had been an encouragement to resolve conflicts, challenge assumptions, break constraints, and solve problems, not compromise on the solution.

It had been a call to stop settling for averageness.

So, where are they now?

In the last four months of 2010, they sold 17 homes, five homes above budget, and ended 2010 seven sales (20%) above budget, remarkable, considering they had been six sales behind budget at the end of May. During the first five months of 2011, they have sold 25 homes, five homes (25%) above an increased sales budget (the 2011 budget calls for four sales a month, up from three sales a month in 2010).

All told, in the nine months since we had last reported on this team’s accomplishments (in August 2010), they have sold 42 homes, an average of 4.5 homes a month. The conversion percentage, which had been 7.25% when we last reported it, has increased to 7.90%. In the first five months of 2010, before the change, the team had sold just 10 homes; in the first five months of 2011, the team sold 25 homes, a 250% improvement.

Here is what this manager now says about the intervening performance:

“In recent months, our traffic has been strong, but our conversion rate has fallen off. We are addressing that problem. However, our research indicates that we have not lost a single sale to competing projects. It just appears, in our demographic, we are experiencing caution from buyers about moving forward. Getting buyers off the fence has been a challenge recently, but the team is committed to working together, and they discuss and strategize about each prospect.

“On nearly a dozen instances, I have been pulled aside by Realtors who wanted to complement the sales staff. They recognize that this team works together – with each other – like no other on-site new home sales team they have ever encountered. The Realtors clearly see it, and prefer it, because they do not like to get involved with competing sales people, they do not want to worry about not being treated the same by everyone, and they do not want to worry about having the best interests of their buyer’s served.

Then, he added, “After the lockout, we expect to meet with the NFL, and secure the football purchase agreement for the 2011-2012 season.”

They might just get it.

Sustaining the Housing Recession

Posted June 2, 2011 By Fletcher Groves

“Since the housing market began to turn in 2007, Washington has tried to keep prices from falling with every policy gimmick known to politics: Foreclosure mitigation, more guarantees from the FHA, higher guarantee thresholds from Fannie Mae and Freddie Mac, Fed purchase of mortgage assets, and the $8,000 home buyer’s tax credit promoted by the White House and Georgia Republican Senator Johnny Isakson.

“Their main result, other than subsidizing some Americans at the expense of others, has been to sustain the housing recession over a longer period of time. The price decline would have been sharper without them, but the recovery would have happened sooner and would probably be well underway by now.”

– “The Housing Illusion”, Wall Street Journal, June 2, 2011

 

“I have been through every economic (and housing) recession since 1974. Whether that makes me wise, or simply a relic, I am not sure. I do know this recession is not only worse than anything I have experienced, it is much more complex. We live in a world of cause and effect. This time, the chain of cause and effect is longer and more complex.

“Which is why we are going to rue the day we decided we were smart enough to make so many decisions, decided we were smart enough to use spending as a stimulus, and smart enough to target so many incentives. We are going to rue the day when we decided not to allow market forces to sort this out. We are going to rue the day that we decided to let people that had never run a business decide how all businesses should be run.

“It would have been painful. Companies would have failed. But, it would likely be over by now. Instead, we are four years into this mess, and we still cannot see the end.”

– “When is a buyers market not a buyers market?”, Escape from Averageness, September 27, 2010