(The Saga of RB Builders is being presented as a nine-part series on Escape from Averageness; editor’s note: The Saga of RB Builders was actually written in 2007, and looks back from the imagined perspective of 2012.)
This is a story about a homebuilding company, that we will simply call “RB Builders”. As this story is being told, it is the end of 2012, and the company is looking back on the previous six years . . .
In 2007, RB Builders had generated $50 million in Revenue, on the sale of 200 homes in a down housing market. Its owners were determined to improve operating performance and business outcomes in 2008. The owners had recently begun discussions with a consulting firm (with whom they had never worked), to work with RB Builders under a new, radically different consulting arrangement, in large measure, because the high six-figure total the company spent with various consulting firms over the previous 10 years had not accomplished anything worthwhile.
As RB Builders did its planning and budgeting for the then-upcoming year, 2008 looked to have market and economic conditions very similar to those in 2007. In 2007, RB Builders produced Gross Margins of 22%, earning Gross Income of $11 million, down significantly from the 30%+ margins it enjoyed during the final, halcyon years of what had since become famously known as “The Age of Homebuilder Entitlement”.
In many ways, RB Builders was a product of that age, just another homebuilding company, satisfied with occasionally adopting other builders’ “best practices”, content to be good, no-better-but-no-worse than the other builders with whom it competed. It was a homebuilding company with a middle-of-the-road approach to delivering the value homebuyers demanded.
Although its owners knew what housing cycles were like, its management did not. Terms like TEFRA and RTC were faint acronyms from a different era. For the previous 10 years, life had been good. But, it was becoming a dangerous approach to business, because – as the saying went – “the only thing in the middle of the road are yellow lines and dead armadillos”.
It was becoming homebuilding no-man’s land.
Locked into an operating model – into organizational structures, management systems, processes, cultures, and employees – that could not deliver extraordinary levels of distinctive value, the company found itself dumped into a teeming mass of homebuilders that all looked the same and sounded the same. Now, indistinguishable from other builders, and unable to create any type of competitive advantage, RB Builders was trapped and sinking – like a modern-day dinosaur – into the tar pits of average-ness.
In 2007, Operating Expense (comprised of indirect, non-variable costs, and now seen as a reflection of the company’s annual investment in production capacity) was 17% of Revenue, earning RB Builders $2,500,000 in Net Income; the resulting Net Income Margin (5%) was less than half the previous year’s margin. Return on Assets was in the single-digit range.
From a production standpoint, RB Builders had long cycle times (close to 180 days), low inventory turns, an uneven rate of sales, starts, and closings, and what it believed was either unused or excess production capacity. From a job costing point-of-view, the company had high job budget variation and slippage, and the resulting number of variance purchase orders was large. In terms of workflow, its processes were largely undocumented, unrepeatable, and unreliable, and a lot of the work it did was of questionable value.
From a product/plan design standpoint, RB Builders maintained a large plan collection, many of which never sold. Instead of plans that recalled the accuracy and practicality of master builders, the company created designs with impractical layouts and difficult dimensions. Instead of elegance – design and finish that was timeless, tasteful, simple, suitable, easily-built, long-lasting – RB Builders opted for the appearance of luxury. In terms of architectural interpretation, its homes offered a shallow illusion of architectural style, not a meaningful interpretive allusion.
Clearly, there was ample room for improvement.
However – there was also a certain pervasiveness, an attitude of complacency, entitlement, acclimation to easier times, and resignation toward current conditions.
Management and staff had become accustomed to a salaried life, supplemented by performance bonuses based on individual job performance. Moreover, there had been no underlying focus to the previous improvement efforts. And – now – there was no consensus on where to start, and there was little confidence that future improvement projects would fare differently.