Archive for October, 2012

(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.)

 

With the housing market finally expected to rebound somewhat, RB Builders’ 2010 GI Baseline and GI Target now looked like Table 2 (below).  The 2010 GI Baseline was considerably higher than the 2007 GI Baseline, reflecting the different (better) market and economic conditions;  as such, the baseline representing “business-as-usual” and “expected” performance had moved up, but it was still just that, “the performance expected under current reality”, and the differences between the 2010 GI Baseline and GI Target reflected those expectations.

RB Builders achieved its 2010 GI Target.  Viewed over time, the company’s improved results speak for themselves.

Table 2 (capture)

Under the new program, the company’s Revenue had increased by more than 80%, from $50 million in 2007, to $91 million in 2010.  Gross Income had more than doubled, from $11 million in 2007, to almost $24 million in 2010.  The growth in Revenue and Gross Income occurred with only a 23% increase in the level of Operating Expense, from $8.5 million in 2007, to $10.5 million in 2010.  As a result, RB Builders’ Net Income had more than quadrupled, from $2.5 million in 2007, to $10.4 million in 2010.

Because the level of invested assets had not changed, RB Builders’ Return on Assets had also quadrupled, from just over an 8% return in 2007, to almost a 35% return in 2010.  Distributions to teammates (employees) had increased from $450,000 in 2008, to $2,025,000 in 2010, while additions to Retained Earnings and distributions to owners had increased from a total of $900,000 in 2008, to more than $4,000,000 in 2010.

And – what of RB Builders’ intrepid results-based consultant?

Her firm received more than $1.2 million over their three years of involvement with RB Builders, more than it would have received under a conventional, fee-for-service arrangement.  However, her firm’s compensation was proportional to its partners at RB Builders, commensurate with the risk it assumed, and reasonable in view of its role in the business outcomes it had helped RB Builders achieve over that period.  After all, RB Builders had pocketed $12 million in additional Gross Income above the GI Baselines – Gross Income that RB Builders acknowledged it wouldn’t have otherwise earned – which it was then able to allocate in the form of $3.6 million to additional Retained Earnings, $3.6 million in additional distributions to owners, and $3.6 million in performance compensation to the company’s employees under the RBC.

Confident the company had learned from all of its projects and was now capable of going forward on its own, RB Builders’ intrepid, results-based consultant turned a valued client loose at the end of 2010, and moved on to new and different challenges.

For its part, RB Builders bid farewell to a trusted advisor, whom it viewed as the architect and project manager that had guided and sustained the company’s turnaround, a partner (in every meaning of the word), and a consultant whom it admired for having the courage to invest in results and learning.

 

The Saga of RB Builders, Part V: Setting Out: 2008-2009

Posted October 25, 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.)

 

And so, RB Builders set out on the road to improving operating performance and business outcomes.  The company’s owners constantly and consistently emphasized the importance of achieving the desired results.  They shared the financial performance and condition of the company openly with the entire team, and taught every team member what was needed to run a homebuilding company as a business.

Over the course of the next two years (with the guidance of its intrepid results-based consultant), the company designed first one, then another, then several more projects, each with short timeframes and targeted results, each the logical successive step in the pursuit of the overall goal.

For example, one project targeted finding/creating an additional $5,000 in value (price minus cost) per base plan within 90 days, without reducing the net value to a single trade partner.  Another project aimed at an average of 45 days in cycle time reductions within three months (from its current level of 180 days, down to 135 days), by removing unmanageable float and resolving resource conflicts, so that jobs finished sooner.  A third project indexed RB Builders’ processes by order of importance and performance, and set out to completely eliminate non-value-adding work in the most critical processes within 90 days.  A fourth project aimed at completely redefining the product offering portion of the company’s value proposition.

On it went, one project after the next.  Some projects addressed margins, while others targeted productivity;  some targeted scheduling, some targeted workflow, and some targeted product design.  Most of the projects were done in sequence (not in parallel), and the active projects always focused on some constraint, focused on relieving something that limited or restricted RB Builders’ ability to generate higher levels of Gross Income.  Because the projects were perceived as focused, relevant, and do-able, they were widely accepted and enthusiastically embraced.

Along the road, RB Builders embraced flexibility and innovation;  it experimented with different techniques and approaches, but initially shunned major systems or technology conversions out of concerns about its capability to implement the changes.  The company learned from the outcomes of each project, and incorporated what it learned into each successive project.  As RB Builders did more for itself, its confidence in its own capacity and capability to manage change and get results grew;  and, as its own capability and capacity increased, its dependence on the work of its intrepid results-based consultant (now considered a trusted advisor) lessened.

Along the road, the intrepid, results-based consultant kept RB Builders focused on the outcome.  She helped them change their mental models, their way of thinking, in a number of areas.  She taught the company how and when to use all of the tools in the toolbox, without regard to the consulting religion or denomination from which they came.

She challenged assumptions and decisions.  She taught RB Builders how to “see” production, how to look at its production capacity, productivity, and production planning and management.  She shared business principles.  She taught them how to solve core problems.  She helped them design new processes, new production systems, and new measurement systems.  And – because she was invested in the same results as her client – the intrepid, results-based consultant was usually the most reliable barometer for gauging the choices of where and when RB Builders should expend effort and resources.

Throughout the journey, the intrepid, results-based consultant shouldered her load tirelessly, coordinated (as needed) the different roles of other consultants, assumed exactly the same risks and was rewarded on the same basis as her RB Builders partners, and remained transparent, shunning the spotlight and recognition.

By the end of the first year (2008), RB Builders had generated $1.2 million in Gross Income above the GI Baseline, distributed more than $450,000 in bonuses and compensation, and increased Net Income by almost $750,000 (half of which was left in the company as additional Retained Earnings, and the other half distributed to owners).  Net Income Margin and Return on Assets improved by more than 20% (from 5% to 6%, and from 8% to 11%, respectively).

Encouraged by the initial success of their Results-Based approach, RB Builders continued to systematically exploit opportunities to increase Gross Income in the year immediately following 2008, by investing intelligently and sensibly in new technology, in enhancements and upgrades to existing systems, and by taking on additional and more challenging constraints to what had by now become their unifying focus:  achieving year-over-year increases in targeted levels of Gross Income exceeding every year’s baseline.

 

The Saga of RB Builders, Part IV: A Stake in the Outcome

Posted October 18, 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.)

 

The final condition imposed by RB Builders’ owners was that any cost associated with this results-based approach be self-funding (in other words, it had to be paid for from the outcomes it produced).  Therefore, payouts under the plan had to come from performance above the GI Baseline;  in no way could any payout diminish Net Income.

Mindful of the self-funding requirement and comfortable with the decision to focus on Gross Income – and wanting a plan that would be seen as reasonable and would motivate the behavior of all its internal stakeholders – RB Builders’ owners agreed to distribute all of the 2008 Gross Income Reserve (the Gross Income earned above the GI Baseline, projected to be the difference between the GI Baseline and the GI Target) on the following basis:

Retained Earnings:  30% ($450,000)

Distributions to Owners:  30% ($450,000)

Employees:  30% ($450,000)

R-B Consultant:  10% ($150,000)

Having the same percentage distribution (30%) as RB Builders’ owners made the company’s employees – for the first time – want to think, care, and act more like business-owners, and, thus, they began to view RB Builders’ owners (and their intrepid, results-based consultant) as partners with common goals and mutual self-interests.

In order to maintain the level of intensity and interest throughout the year – and to avoid paying distributions from Gross Income the company would have expected to receive anyway – RB Builders created a progressive, rear-weighted payout system based on the achievement of Gross Income Milestones.

If RB Builders fully-achieved its Gross Income Target, the plan would pay out eight times a year.  The amount of a GI Milestone was determined by dividing the Gross Income Target ($12.5 million) by the number of milestones (8).  In 2008, the way the numbers worked out, it resulted in GI Milestones sized at a little over $1.5 million:

$12,500,000 ÷ 8 = $1,562,500

Whenever the company reached a GI Milestone (i.e., generated $1,562,500 in Gross Income), the plan would pay out the employee and consultant portions of the distribution.  By design, each successive GI Milestone was worth more than its predecessor.  The first payout was only worth $30,000, but it would payout early in the year, around mid-February;  the eighth payout was worth $150,000, but the team would probably be in a race to reach that milestone before the end of the year.  The amounts of payouts two through seven fell progressively between payouts one and eight.

The distribution of Gross Income above the GI Baseline was strictly conditioned upon the generation and receipt of Gross Income:  If fewer milestones were reached, the number of payouts was automatically reduced, and – owing to the progressive nature of the payouts – the amount of the payouts from the milestones that were reached was considerably less.  The arrangement applied to everyone – owners, executives, employees, intrepid results-based consultant, alike.  It was perceived as fair, by everyone.  It was an arrangement ideally suited to a savvy, mutually-accountable, motivated team pursuing a common goal, one in which there would no longer be winners and losers, only winners or losers.  It was an arrangement that gave company leaders the credibility to lead, to demand performance and results.

 

The Saga of RB Builders, Part III: A New and Difficult Course

Posted October 11, 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.)

 

With this mutual understanding – with these mutual assurances and this mutual trust in place – the intrepid, results-based consultant began by helping RB Builders understand (and confront) the facts of their current reality, starting with an objective analysis and assessment of the company’s current performance, resources, and capabilities, and its current limitations and constraints, followed by an analysis of the chain of events and factors that had led to that condition.  The Current Reality Assessment was completed within a matter of days.

She then challenged RB Builders to chart a new and different course, one that would focus on improving the outcome in a single, pivotal measure of business performance, a measure that affected a range of issues (like pricing, direct costs, and productivity) and had implications for every home RB Builders built and sold.  The intrepid, results-based consultant allowed that there were a lot of important measures of operating and business performance, but she suggested that RB Builders look at a measure like Gross Income.  She recommended that the company start by establishing a baseline that represented the performance the company was currently capable of achieving, and then target a new level of performance that was considered ‘beyond current capability’, but would be possible, with sufficient urgency, intensity, focus, and motivation.

The company and its owners weighed a similar measure (Contribution Margin) before concluding that – while either measure would work – they would use Gross Income.  The current baseline performance was referred to as the Gross Income Baseline (GI Baseline), while the new target was dubbed the Gross Income Target (or GI Target).  The difference – the gap – between the GI Baseline and the GI Target was referred to as the Gross Income Reserve (GI Reserve), and it would become an important part of the new plan.

From their new-found perspective of current reality (as viewed from their new-found understanding for how systems work), a GI Baseline (2007) and a GI Target (2008) emerged (Table 1, below).

Table 1 (capture)

Prior to the adoption of its results-based approach, RB Builders had a mental model that was a “more-for-more” proposition, wherein the answer to more revenue and more output was more of everything else – more capacity, more resources, more plans, more steps, more reports, more money, more starts, more work-in-process.  What the company really needed was a mental model that was “more-for-less”, a way to produce more revenue/output with less of everything else – less waste, less rework, fewer non-value-added steps, fewer (but better) measures, fewer resources, a smaller (but more intelligent) plan portfolio, less capital (debt and equity), and less work-in-process.

So – one of the necessary conditions that the owners of RB Builders placed on signing-on to the results-based approach was tight control on both the amount of assets and the cost of production capacity – neither work-in-process nor Operating Expense would be allowed to rise above 2007 levels;  the company would have to meet its GI Targets without any additional work-in-process or overhead (and without any additional equity or debt).  At the same time, the owners made it clear that they preferred to utilize the existing investment in production capacity, not cut it.

As business outcomes – profitability and economic return were more important than Gross Income, however (in terms of cause-and-effect), it was Gross Income that drove profitability and economic return.  The focus on Gross Income (as the driver) could not come at the expense of either Net Income or Return on Assets (as the outcome).  So – a positive impact on Net Income was another requirement for the owners of RB Builders signing-on to the plan.

 

The Saga of RB Builders, Part II: Mutual Assurances

Posted October 3, 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.)

 

The new, intrepid, results-based consultant started out by offering RB Builders some assurances.

She told RB Builders that her firm would be compensated on exactly the same basis as everyone else.  She told them that there was no limit to the time and effort her firm would expend to achieve the outcome, that she would work hand-in-hand with them, and do whatever it took to reach their goal.  She assured them that she would do whatever it took to help 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 RB Builders less dependent on their consultants.  She assured them that she was content to remain in the background and to never accept any of the credit.

The new, intrepid, results-based consultant then demanded some assurances of her own.

She made it clear that this was a client-consultant partnership, and that (because the consultant’s compensation was completely results-based, of finite duration, and self-funding) her firm was assuming the higher level of risk.  She allowed that the new, results-focused consulting arrangement they were jointly undertaking did provide ample incentive to everyone for taking action, making changes, and improving operating performance and business outcomes, but that there also needed to be an understanding.

She told RB Builders that she (and her firm) were as serious as a heart attack about getting results.  She made it clear that she had no intention of wasting her firm’s time and effort.  She informed RB Builders that they did not have to do everything she told them, but they did have to come to terms with her.  She wanted assurances that the company would, in fact, take action, make needed changes, and do whatever it took to achieve the targeted results, or – if there was no action, no change, no results – then the responsible heads at RB Builders would roll.

The intrepid, results-based consultant continued, making it clear that – for this new results-based approach to work (and as a condition of her firm’s involvement) – RB Builders would have to make some changes.

She told RB Builders that it had to end its practice of paying individual bonuses based on multiple measures, and replace it with a team-based approach focused on performance related to a single business outcome.  Next, she told the company that it had to change its current thinking on cost behavior and cost reporting (by adopting variable costing methods, by embracing Cost-Volume-Profit relationships, and by preparing financial reports that included a Contribution Income Statement).  Then, she told them that all of the current manifestations of improvement initiatives – failed or otherwise – had to be subordinated to the new approach.

Finally – the intrepid, results-based consultant spoke with RB Builders about the candor, purpose, will, rigor, and risk this arrangement would require, and about her expectations, in regard to their intra- and inter-relationships.  She told them she expected them to speak – and to hear – the truth, to pursue goals that seemed unreachable, to see every situation as they chose to make it (not as they were told it had to be), to stick to agreements and keep commitments, to trust each other.

She told them failure would not be an option.