Archive for September, 2012

The Saga of RB Builders, Part I: The Tar Pits of Averageness

Posted September 26, 2012 By Fletcher Groves

(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.

 

Out from the Abyss

Posted September 24, 2012 By Fletcher Groves

(The Saga of RB Builders is being presented as a nine-part series on Escape from Averageness)

 

There is this scene – final scene – characteristic of films of a certain genre:  The survivors – often as heroes, but always as survivors – emerge from the desolation and destruction to face the light of what remains of their world and figure out how to go forward.

And, perhaps as an industry, homebuilding is now there.

That’s one way to characterize the substance and tone of the exchange I had this week with Bill McBride, who publishes the Calculated Risk weblog and John McManus, who is the Editorial Director for the Residential Construction Group of Hanley Wood.  I had asked Bill whether his opinion stated in Calculated Risk – that NAR-estimated existing homes sales, based on historical turnover rates, were now in a normal annual range of 4.5 million to 5.0 million – also meant that the annual rate of CB-estimated new single family home sales should sooner-than-later settle broadly in the range of 700,000 to 900,000, provided that the relationship between existing and new home sales returned to its historic ratio.

Bill replied, that – yes – that should be the case, provided the “distressing gap” between existing and new home sales, currently at about 12:1, became a not-so-distressing 5:1 or 6:1.  In fact, he picked the midpoint of my inquired range (800,0000) as the expected annual rate of new home sales.

Bill is confident in what he sees.  I am not confident in everything I see.  John says he thinks that all the demand models are broken and nobody really knows what’s next.  John and I would probably agree that Bill is a lot smarter and knows a lot more than either of us.  Bill, John, and I would likely agree that – all things considered – there are worse prospects than a run-rate of 800,000 units per year.

If new home sales more than double from current levels over the next few years, as Bill predicts that they will, then, in my view, it matters – it matters very much – what steps every homebuilding enterprise takes as it emerges, at long last, from the abyss, and how it deals with current reality and whatever the future holds for it.  It matters, the answers it formulates to these questions:  What has to change?  How do you create sustainable competitive separation?  How do you move beyond operations and performance that was previously considered acceptable?  How do you escape from averageness?

That last question was the focus of this weblog, when I began writing it almost four years ago, in January 2009, at a point where we had already been in this housing recession for more than two years.  And, it was at that point almost six years ago, in early 2007, that I had written The Saga of RB Builders, to help explain a new consulting approach, one in which SAI Consulting would offer a high-yield, value-driven, results-based alternative to conventional consulting, one which would result in a new client-consultant partnership, and one which would require significant changes in how client homebuilding companies paid performance compensation, how they made management decisions, and how they focused the improvement effort.

The Saga of RB Builders traced the story of a homebuilding company, as it went through a five-year effort to improve operating performance and business outcomes in a changing and challenging housing market.  RB Builders and its characters were fictional, but the context in which they existed was not.  The story became a prequel to The Pipeline:  A Picture of Homebuilding Production, which will be published later this year.

Written, as it were, in 2007 and looking back – presciently, as it turns out – from a point at the end of 2012, The Saga of RB Builders, in effect, looks back to the future, and reads like historical fiction.  Written, as it were, in 2007, The Saga of RB Builders could not do justice to the length and depth of this recession, the immense carnage to come, the extraordinary damage to margins and volumes, to Balance Sheets and careers, that would ensue.

Yet, if I were asked, as the author, what aspect with which I am most satisfied, it would be that the story seems unaffected by the passage of period of time – and, thus, The Saga of RB Builders remains extraordinarily relevant.

It is a path out, from the abyss.

Part I:      The Tar Pits of Averageness

Part II:     Mutual Assurances

Part III:    A New and Difficult Course

Part IV:    A Stake in the Outcome

Part V:     Setting Out:  2008-2009

Part VI:    2010:  Farewell to a Trusted Advisor

Part VII:   Pre-2012:  A Changing Market

Part VIII:  More-for-Less

Part IX:    2012:  Beyond Current Possibility

 

Good Process Design

Posted September 16, 2012 By Fletcher Groves

We have been mapping processes – helping clients document, redesign, and improve workflow – since 1996.  In different vertical spaces, for dozens of clients.  Early-on, it became very apparent that the majority of enterprises don’t come into BPI or BPR initiatives with an understanding of good process design.

So – we have always taken the time to prepare and provide process design guidelines for these engagements.  These process design guidelines are now in their fifth generation, and the revisions to these guidelines reflect the progression of our thinking on the design and management of business processes.  These guidelines reflect, as well, our inclination to incorporate process methodologies and tools that work, without regard to their process denomination.

As we have stated previously on Escape from Averageness, to a certain degree, workflow is workflow, process is process.  There are common principles of process design, and while each set of process guidelines is crafted with the needs of each client in mind, much of good process design tends to transcend industry classifications.

We offer these process design guidelines from a recent engagement involving one of the business units of a community bank as an example;  clearly, a specific client, with specific circumstances and requirements.  But – substitute your own terms, definitions, and org structures, and see if these process guidelines don’t make remarkable sense in the workflow world in which your own enterprise operates:

1.   Start process design and redesign efforts from the desired future state of the process, and work backwards.  What is the intended result?  What do we want the process to be capable of doing?

2.   Set specific performance requirements for new processes.  Make the connection between better operating performance – in terms of shorter lead time and higher productivity – and the resulting increase in profitability and economic return.

3.   Focus on the outcomes that satisfy both the Borrower’s and the Investor’s requirements, on outcomes that simplify the process, and eliminate the non-value-added activities – the waste, errors, redundancy, and bureaucracy – that have been built into the process.

—  Overly-complex processes require a multitude of simple tasks to operate, but processes that are elegant – processes that are simple, themselves – require a different approach.  In order to make the new process easier to manage, use complex tasks – sets of tasks that were previously handed-off between departments – that can be performed by one person.

—  Processes that are focused on specific product families generally produce better designs.  Avoid designing one-size-fits-all processes – particularly on value delivery processes;  they will be too complex, they will be compromised.

—  Place the authority and responsibility for decision-making with the teammates who actually do the work, without imposing the requirement for unnecessary reviews, inspections and approvals.

—  Reduce the number of unnecessary reports, files, and documents in the system, while standardizing and automating the remaining, essential documentation, paper or otherwise.

—  Capture information one time – at its source – preserve it, and make it available for all future users – online, real-time, and universally accessible.

—  Solve the problem, don’t treat its symptoms.  Replace the current practice of reviewing and correcting errors with a problem-solving method that prevents the errors from ever occurring in the first place.  When problems do surface, stop the process and fix the problem, and insert counter-measures that prevent it from reoccurring.

—  Build the necessary controls into the front-end of the process.

4.   Eliminate process variation and uncertainty.  Variation is a form of waste, like anything else that does not add value.  However, variation is more the result of unevenness, and connotes a lack of stability – the inability to produce a consistent result.  Production processes need stability, and variation causes instability.  In many ways, variation is far more damaging to a process than activity that simply does not add any value.  If all [the bank] does is attack waste (in the form of errors, rework, redundancy, etc.), and it fails to directly attack the variation that causes instability, then its mortgage banking operation will have to live with a loan production system that contains some combination of an unmanageable level of loans-in-process, longer-than-necessary lead times, and wasted loan production capacity.

5.   Process design is only part of the battle – the loading and sequencing of work in the process is equally important.  A poorly-designed-but-well-managed process will always outperform a well-designed-but-poorly-managed process.  Eliminate the disconnected, stop-and-start, hurry-up-and-wait, inventory-intensive sequence of loan production associated with the current method for originating, underwriting, processing, closing, and transferring/selling mortgage loan products, and replace it with a system of even-flow production intended to:

—  Recognize the paradox between systems with balanced capacity and systems with balanced production, and treat even-flow production as an outcome (not a mechanism).

—  Produce a protective rate of loan originations, and an even and sufficient rate of loan closings.

—  Maximize the rate of system throughput (rate of loan closings) that can be generated with a planned, finite, and controlled level of loan production capacity.

—  Pull loan applications into the system at the rate of loan closings, rather than push applications into the system without regard to production capacity.  The capacity of a loan production system is determined by the number of loans-in-process and the rate loan closings.

—  Understand that process duration (lead time), throughput (loan closings), and work-in-process (loan applications-in-process) are genetically-attached;  they have the same DNA, and they impact each other in cause-and-effect relationships.

6.   Standardize and simplify a process before automating it.

7.   Let the requirements of processes drive the other components of the business operating model (systems, organizational structure, employee selection, etc.).  Wherever possible, move from a vertical, functional organizational structure to a horizontal, team-based approach aligned with the flow of work and the creation of value.

8.   Although processes present a standardized approach to workflow that promotes consistency, evenness, and stability, those same processes need to support enterprise models that are adaptable, agile, and responsive.

9.   Processes benefit from a systems approach to continuous improvement.  The goal is not to improve the performance of the process – the goal is to continuously improve the performance of the overall system.  99% of the improvement in operational performance will come from improving performance on whatever resource is the system’s constraint.

10.   Processes don’t perform work or deliver value – the people working in the process do.  Make the training, performance measurement, and – especially – the compensation structure reflect the performance requirements of the new process.

 

"I remember where I was . . . I remember who I was with."

Posted September 10, 2012 By Fletcher Groves

(An updated version of this entry is posted on “Escape from Averageness” every year nearing the anniversary of the 9/11 attacks)

 

“What is it that you remember most about 9/11?”  Whenever I am asked that question, my answer is invariably, “I remember what I can never forget.”

On Tuesday morning, September 11, 2001, I was in the offices of Fidelity Homes, in Venice, Florida, just starting a process mapping engagement that would give this start-up builder a state-of-the-art set of business processes.  SAI’s involvement was part of a large pro bono effort, sponsored by Professional Builder, that included a number of top consultants then serving the homebuilding industry.

I was the Process Architect for Fidelity Homes.

Sitting across the table were David Hunihan and Todd Menke, two young builders, eager to take their experience in homebuilding and pursue a National Housing Quality award.  To this day, I think David and Todd represent the entrepreneurial spirit and personal courage that makes this country and this industry great.

We had barely started, when David was pulled away by a telephone call.  It was his wife, Lauren, asking if he was aware of what was going on in New York City.  As the events continued to unfold, in New York City, in Washington DC, in western Pennsylvania, we eventually found that it was impossible to focus on mapping processes, and whatever we were doing did not seem all that important, anyway.  We cancelled everything for the rest of the day, and, in our own ways, watched and processed what was happening.

Bill Lurz, then a senior editor at Professional Builder, joined us the following day.  We finished the project two days later, and I drove back to my family in Ponte Vedra Beach through a tropical storm. The hugs had more conviction than usual.

The articles were written for Professional Builder.

I still consider this to be a matter of remaining, unfinished business for this country.  Time has not changed my feelings one iota.  We were attacked because of who we were, and because of who we remain;  evil is still the enemy of good, and evil still has a face.  In the face of that evil, I wonder if we have failed to clearly state what war is, and why war is never to be entered into lightly;  I wonder if we have too readily dismissed the concept of utter and complete destruction of an enemy.

 

On the lasting meaning of 9/11, I think WSJ’s Bret Stephens said it very well, in contrasting the 10th anniversary of Pearl Harbor with the 10th anniversary of 9/11:

[on December 7, 1951], “Americans could look back to Pearl Harbor and see its bookends in VE Day and the Japanese surrender on the USS Missouri.  In that light, Pearl Harbor may have been a day of infamy but it was also, for the intelligence failures and military defeat it represented, a day to live down.

“The war that was begun on September 11 has no bookend.  We don’t even know whether we are in the early, middle or late chapters — or whether we’re still in the same book. Perhaps that’s why dates like November 13, 2001 (the day Kabul fell to the Northern Alliance) or April 9, 2003 (when Baghdad fell to the U.S. Army) go down the memory hole. I doubt many people can recall the exact date Osama bin Laden was killed.

“So 9/11 remains a date and an event unto itself, somehow disconnected from everything that still flows from it.  No doubt that helps draw a line between our feelings about it and [its] controversies . . . But it also strips the day of any context, intelligibility or a sense of the greater purposes that might flow from it. This is how an act of evil and of war has been reduced, in our debased correct parlance, to a “tragedy”.

“There is something dangerous about this.  Dangerous because we risk losing sight of what brought 9/11 about.  Dangerous because nations should not send men to war in far-flung places to avenge an outrage and then decide, mid-course, that the outrage and the war are two separate things.  Dangerous above all because nations define themselves through the meanings they attach to memories, and 9/11 remains, 10 years on, a memory without a settled meaning.

“None of that was true in 1951.  We had gone to war to avenge Pearl Harbor.  We had won the war.  We had been magnanimous in victory.  The principal memorial that generation built was formed of the enemies they defeated, the people they saved, the world they built and the men and women they became.  Our task on this 9/11 is to strive to do likewise.”

 

In the years that have followed, lives and careers have changed.  But, I will never forget where I was, or who I was with.