(Lessons from the Pipeline© is the business case study being used at the next Pipeline workshop™)
It is the beginning of 2015. RB Builders aims to extend its reputation as a builder thriving on both the margin and velocity sides of Return on Assets into a new geographical market, through the late-2014 acquisition of an existing homebuilding operation.
Although it serves a similar and compatible segment of the new home market, the newly-acquired division of RB Builders has historically generated much lower operating results and business outcomes. RB Builders is satisfied with the land/lot positions that came with the acquisition; it has completed the conversion of the management technology system and started the adoption of new business and operating processes; it is confident that it can unify, then develop and improve the capabilities of the team that is in-place, to one replicating its own savvy, motivated, and accountable homebuilding team.
RB Builders has been down this road before.
RB BUILDERS: At the beginning of 2008, seven years earlier, shortly after the end of the halcyon period known as the Age of Homebuilder Entitlement®, RB Builders had begun its own transformation process, to extract itself from what it self-described as “the tar pits of averageness”.
RB Builders had used a combination of four main initiatives: (1) a team-based performance compensation plan directed at achieving targeted results above a baseline to a single business outcome, paid-out upon achievement of a series of progressively-weighted milestones; a way of sharing the numbers that produced full financial transparency; an accounting system that connected operating performance to business outcomes more effectively, via actionable data; and a focused process of continuous improvement, comprised of a prioritized series of consecutively-ordered initiatives, all with short durations aimed at achieving targeted, defined, measurable results.
As a result of this program, RB Builders made massive strides.
During the ensuing five-year period (2008-2012), annual Revenue had grown from $50 million to more $121 million, an increase of almost 250%. During the same period, the number of closings had increased more than 225%, from 200 houses per year to 453 houses per year. Despite the margin pressure from increasing market share so dramatically, overall Gross Margin had actually increased slightly, from 22% to 24%; as a result, RB Builders’ Gross Income had grown by more than 250%, from $11 million $29.5 million.
During the same period, Operating Expense had increased (from $8.5 million to $11 million), but that 30% increase was far less than the same-period increase in Revenue. As a result, RB Builder’s Net Income had risen from $2.5 million to $16.5 million, more than six times what it had been before the company began its transformation; Net Margin had almost tripled, from 5% to 14%.
In 2008, RB Builder’s cycle time had been 180 days; by the end of 2012, cycle time had been reduced to 65 days. In 2008, the average amount of work-in-process had been 100 houses under construction; by the end of 2012, average work-in-process had decreased to 80 houses under construction.
RB Builders had targeted an inventory turn of 2.5x in 2008, which was actually an improvement from the preceding year; in 2012, by keeping its work-in-process at 80 houses and closing 453 houses, RB Builders had been able to more than double its physical inventory turn, to 5.7x.
In 2008, RB Builders had turned the value of its assets twice; in 2012, it turned the value of its assets 4.7x. Because it had been able to maintain margins while significantly improving velocity, RB Builders saw its main barometer of economic return – Return on Invested Assets – increase almost six-fold during the five-year period, from a targeted 11% in 2008 to the 64% it achieved in 2012.
In 2013, RB Builders had moved all of its raw land holdings and developed lot inventory off of its balance sheet, and into subsidiaries, which would have served to further increase Asset Turn, and ROIA, had those measures been restated to reflect the remaining assets.
It was a remarkable transformation.
THE NEW DIVISION: In the year just completed (2014), which was also its final year of independent operation, the newly-acquired homebuilding operation had closed 48 houses, and generated $12 million in Revenue. With its $8.88 million in Cost of Sales now reflecting only its direct, variable costs, the operation generated $3.12 million in Gross Income, a 26% Gross Margin.
With its $2.16 million in Operating Expense now reflecting only its indirect, non-variable costs, the operation had produced $960,000 in Net Income, resulting in an 8% Net Margin.
During 2014, the newly-acquired operation had a calculated cycle time of 255 days, even though its job schedules typically called for 120 days; in 2014, its average work-in-process was 34 houses under construction. With 48 houses closed and an average work-in-process of 34 houses under construction, the newly-acquired operation turned its physical inventory 1.4x in 2014.
Adopting the policy of RB Builders, and moving all of its raw land holdings and developed lot inventory off of its balance sheet, and into subsidiaries, the newly-acquired building operation had showed restated work-in-process of $4.46 million; with $12 million in Revenue, it had reported an asset turnover ratio of 2.7x.
With its Net Margin of 8% and its restated asset turn of 2.7x, the new operation had posted a Return on Invested Assets of 21.6%.
Come participate, as RB Builders’ newly-acquired building operation endeavors to replicate the transformation of its parent company. Lessons from the Pipeline© is the underlying business case study at the next Pipeline workshop™, being held March 11-12, 2015, at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida. Cost is $795.00.
Delivered by SAI Consulting and Continuum Advisory Group. Sponsored by Big Builder (Hanley Wood) and CAG.