The Saga of RB Builders is a nine-part series on Escape from Averageness; this installment (Part IX) is the final chapter.
As I said in the prologue to this series, Saga is 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. Written, as it were, in 2007 and looking back from a point at the end of 2012, the story, in effect, looks back to the future, and reads like historical fiction.
Obviously, that perspective cannot 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 lessons of The Saga of RB Builders remain extraordinarily relevant.
It is a path out, from the abyss.
RB Builders’ GI Targets had always reflected a level of performance that was considered beyond its current capability, a level of performance that was possible, but only through extraordinary amounts of urgency, intensity, focus, and motivation. Far from conducting business-as-usual, the 2012 GI Baseline had not cut the company any slack – it was a stretch, itself, under the anticipated market conditions.
Every year, RB Builders had reached its GI Target. 2012 was a different story (see Table 4, below). RB Builders went beyond its current capability; it went beyond what anyone in the company believed was possible.
The company got serious about increasing productivity and utilizing its production capacity. It attacked resource constraints, as well as the excessive safety built into schedules to protect phase completion dates. It relentlessly attacked anything that didn’t add or create value, from the homebuyer’s perspective. It reallocated personnel – freed by “doing less, but delivering more” – to more productive work, work that generated more Gross Income.
RB Builders continued to refine the ability of its operating model to deliver on its value proposition – it continued to improve the capability of its organizational structure, management and operating systems, business processes, homebuilding team, and culture to deliver extraordinary levels of the distinctive product and service value demanded by the narrowly-defined segment of the new home-buying market the company had purposely chosen to serve.
Its product (its plans, elevations, specifications, finishes, features, options, and communities) became more distinctive and evocative; its service became more focused, more useful, and more to the point.
During 2012, RB Builders closed 453 homes, 53 more than its target. With only 80 homes under construction, cycle time dropped to 65 calendar days, 25 days less than its target (90 days). Acquiring the additional market share in a down housing market resulted in a lower average sales price, but the company had held the line on direct, variable costs, so that it met its Gross Margin Target (24%).
RB Builders’ 2012 GI Target was $25.9 million; the company generated Gross Income of $29.5 million, $3.6 million above its target. The company also held the line on indirect, non-variable costs, so that its Net Margin exceeded the target (14% versus 13%), even considering the higher cost of its results-based compensation. RB Builders had targeted Net Income of $14.1 million; when all was said and done, the company actually earned $16.5 million, $2.4 million above its target. The combination of higher Net Income and lower levels of work-in-process pushed Return on Assets to 64%, exactly eight times the economic return the company had earned in 2007.
Not only had RB Builders reached its 2012 GI Target (and achieved all eight GI Milestones), it had exceeded the GI Target to the point of achieving a ninth milestone.
Since its GI Target was the sum of its GI Baseline and (projected) GI Reserve, the milestones that made up RB Builders’ GI Target (milestones 1-8) were always considered to be a blend of the expected and the extraordinary, progressing toward the extraordinary. However, the achievement of 2012’s GI Milestone 9 was purely extraordinary, in terms of anything the company had accomplished before.
With its annual overhead and the cost of its production capacity fully absorbed in the previous eight milestones — and with its projected GI Reserve more than doubled — the $3,600,000 in additional Gross Income from GI Milestone 9 was distributed in its entirety.
The employee payout went to one-third of the milestone, to $1,200,000, more than doubling the payout for the entire year. The remainder of GI Milestone 9 ($2,400,000) was left in the company as an additional $1,200,000 in Retained Earnings, matched by distributions to owners ($1,200,000).
All of which was completely self-funded from performance above its baseline.
 Remember – by this time, RB Builders was on its own. The 10% that had gone to RB Builders’ intrepid, results-based consultant was being allocated evenly between additional retained Earnings, Cash Distributions to owners, and employees.