Archive for August, 2011

The Modern Builder Welfare State

Posted August 28, 2011 By Fletcher Groves

Back in early 2009, the very first entry to SAI’s “Escape from Averageness” weblog asked this question: “Does the world really need one more average homebuilding company?” Before 2006, during the roughly ten-year, halcyon period that I describe as The Age of Homebuilder Entitlement, the answer may not have been a resounding “yes”, but it was certainly a strong “It’ll do”. It was a sense of entitlement to high margins that were too easy to come by. Builders did not have to be good, they just had to be available.

John Caulfield’s well-written, well-researched feature article in the August issue of Builder (“Debt-Ridden Nation Takes a More Skeptical Look at Its Investment in Promoting Homeownership”) clarifies the positions we have witnessed this industry taking, still aptly described by the term “entitlement”.

That sense of entitlement is now characterized by an obsession with maintaining government support of homeownership. Actually, the obsession has nothing to do with homeowners, but has everything to do with the industry that provides the object of that ownership.

Somehow, the federal government, directly or indirectly, is supposed to assure, insure, provide, or otherwise be responsible for all of the following:

— Continuation of an affordable 30 year fixed rate residential mortgage instrument.
— A QRM standard that obviates standards.
— A viable secondary market for mortgage securities.
— Higher conforming loan limits.
— A continuation of the current system of public housing finance, in some form.
— Five-year loss carrybacks.
— Mortgage restructuring assistance.
— Homebuyer tax credits.
— Continuation of the mortgage interest deduction.
— Foreclosure mitigation.

And, it’s all working so well for us, isn’t it? It is, at its core, an unreliable dependency. We have never built in times in which so much was beyond our control, in times when so much upon which we have grown to depend was being done so ineffectively, so incompetently.

The futility of feudalism.

I have a different idea. The homebuilding industry should collectively tell its trade organization, its lobbyists, its members of Congress, and the White House that we don’t want the modern builder welfare state. Any of it. Get rid of it. In its place, give us:

— Significant, permanent reductions in marginal personal income tax rates, and an elimination of most of the deductions; 

— A personal federal income tax structure that requires every wage earner to pay some income tax; 

— Lower tax rates on capital gains; 

— Elimination of the corporate income tax; 

— Dramatically lower levels of government spending, including meaningful, effective, fair entitlement reform; 

— Minimal involvement in housing finance; 

— A wholesale reduction in business regulation.

There is a natural, sustainable demand for what we do – selling and building new homes – if there is a viable, growing economy in which to do it. Give us an economy that will grow and be competitive in the world. Give us back market forces – in prices, in interest rates, in risk, in mortgage terms, in securitization. Let the market correct, heal, and restore itself.

Give us a simple, elegant, non-conflicting set of rules.

We will figure the rest out on our own.

It will be painful. There will be a lot of change. Some builders will not make it. We will wish we had done it sooner. But, we are now at risk of losing far more than our entitled existence.


Building Urgency Towards Results

Posted August 15, 2011 By Fletcher Groves

[Note: We occasionally feel compelled to share what we feel are the meaningful, worthwhile insights from our consulting work, albeit, in broad and general terms that protect intellectual property and client confidentiality.]

This is a summary of the initial projects and schedule we recommended on a recent engagement with one of our clients. It is a picture of the type of urgent, focused, rapid-results process of continuous improvement that is one of our two major requirements for working with clients – and being compensated – on the basis of the progress they achieve toward a specific financial outcome (the other requirement is having a team-based performance compensation plan tied to the financial results of the improvement process, something that we can also participate in, so that everyone has a financial stake in the outcome).

These recommendations flowed from an upfront assessment of the client’s current situation – “current reality”, as we like to say. This happened to be a semi-production builder that starts a large percentage of inventory/spec homes, and has significant lot positions across a large number of communities in which it is the only builder.

The business model might be different, clearly, the recommendations are specific to the situation, but the principles and insights are transferable.

In this particular situation, there was very little time with which to work, inside of 60 days. The pegging of the company’s current reality was completed on 05-10-11. The team-based performance compensation plan was intended to kick-off on 07-01-11, and most of these projects needed to be completed in time to coincide with the start of that compensation arrangement.

Here they are:

P-1: Produce a Contribution Income Statement and conduct a thorough breakeven analysis on every community, shelve the communities that are unviable in the current situation, shelve the less-viable communities that rob other more-viable communities of needed resources (whether money or teammates), focus the resources, and set aggressive new sales targets fueled by lower sales prices. Moreover, make it do-or-die, and drop the prices in advance of any demonstrated improvements in margin or velocity. Timeframe: 14 days (05-27-11).

P-2: Refine the product (plan) portfolio. Cull the product portfolio for the remaining active communities to remove the plans that do not sell. Fix the budget errors in the remaining plans, and then start extracting more value (value = revenue – cost of sales). Find a way to generate higher Gross Income (on prices that have already been set lower). Prerequisite: P-1 complete. Timeframe: 42 days (06-24-11).

P-3: Begin to drive significantly higher levels of traffic, conversion, and sales, by any means necessary, except by spending more money. Find a way to get it done. Prerequisite: P-1 complete. Timeframe: 49 days (07-01-11).

P-4: Revamp the front-end of the value delivery process — the Contract-to-Start process — in order to increase its capacity and reduce its duration. Prerequisite: P-2 complete. Timeframe: 7 days (07-01-11).

P-5: Attack velocity in the Start-to-Completion process, by setting much more aggressive targets — shorter job task durations with no hidden safety, a project (job) portfolio with all resource contention resolved, thereby producing shorter cycle times that will, in turn, result in an increased rate of periodic closings, generated with a planned, finite, and controlled amount of work-in-process and production capacity. Prerequisite: P-2 complete. Timeframe: 92 days (09-23-11).

Five projects. Four and one-half months.

When we initially discussed the requirements with the client, this is exactly what I told them:

“If I were you, I would come up with a series of short, targeted projects, prioritized and sequenced according to whatever is the biggest constraint to wherever you have chosen to go, and I will tell you right now, it needs to be expressed as — and focused on achieving — a specific business outcome. Give it top-down leadership, but tap into broad, bottom-up involvement. Create a strong sense of mutual accountability, responsibility, and rewards. Focus on achieving rapid results. Learn by doing. Build long-term capability.”

If it was a different client, in a different situation, it would have no doubt required a different plan. But — whatever the situation — this is the type of urgency that continuous improvement needs to foster.