One Homebuilder’s Stress Test: Why We Map Processes

(originally published on Escape from Averageness® in August 2010 under the same title;  re-edged and republished in June 2013, as part of our retrospective Above Average:  The Best of Escape from Averageness®, 2009-2012;  updated and re-posted here, as a reflection on the more recent, self-induced struggles of two other builders with their own business processes)

Business Process Improvement – the documentation, analysis, measurement, design and redesign, improvement, and management of operating and business processes – is the area for which SAI is most recognized.  We have done more pure work with processes – and done it longer – than anyone in the homebuilding industry.

Almost every consulting engagement we have ever accepted has involved structuring an enterprise (both in and out of the homebuilding industry) around its critical business processes.  There is a reason for the centrality of process workflow:  the only way an enterprise makes money is by creating value;  the only way it creates that value is through the work that it performs;  and the way that it performs most of this work is in processes.

Every other component of an enterprise’s operating model – it’s systems, its organizational structure, even its culture – needs to be subordinated to the processes that produce stakeholder value.

But, even that proposition and prioritization does not do it justice.  Process mapping is far more than documenting, analyzing, measuring, redesigning, and improving workflow;  it serves to connect work to operating performance, and operating performance to business outcomes.

In that sense, process mapping administers something of a stress test;  some pass the test, others don’t.

In 2006, we were engaged by a previous winner of the National Housing Quality (NHQ) award to map its business processes;  bear in mind, in order to be awarded this distinction, the company’s processes had been previously vetted and judged as part of the NHQ examination.

From the start, there were troubling indicators.

As the work unfolded, we pointed out discrepancies between stated operating performance and stated economic returns.  We explained the production physics, and questioned whether the stated performance could have possibly occurred.  We highlighted the declines in operating performance and business outcomes, to which they seemed oblivious.

From a process standpoint, we observed that this company had “a very iterative product design process exposed to an impulsive/compulsive design mentality”, that this was a process with 132 discrete process activities/steps – involving 33 handoffs, 19 reviews, eight approvals, 14 sections of activities where the work of one person or department was subsequently revised.  The project team was unwilling to self-classify a single one of these 132 activities as value-adding, but it classified almost 30% of them as completely non-value-adding.  This was a process that took upwards of 12 months to design a new plan.

New Plan Design was the poster-child for poor process design, but it was not a sclerotic aortal mess.  That would be their Start-to-Closing process, where we calculated cycle time at 279 days, and demonstrated that this process could not possibly be achieving the 5.2x asset turnover they asserted it was.

We stressed the need to establish a set of operating and business measures as the performance requirements for the new process designs, yet they failed to produce a comprehensive, connected set of operating and business outcomes.  The need for (or importance of) performance requirements did not strike a chord with either the executive group or the process teams.  Given the existing level of operating and business performance, we told them that we found “the level of disinterest – the lack of resolve – disturbing”.

This was a builder that had produced an ROA of only 4.7% in 2005;  in the Era of Homebuilder Entitlement, economic return should have been eight-times that level.  Moreover, this was an enterprise that six weeks earlier had been forced to take the gut-wrenching action of terminating the employment of 40 teammates.  We pointed out that the real situation was certainly much worse, that the indicated economic return of 4.7% overstated the company’s true performance, because a .9% Net Income Margin was being masked by the impossible-to-achieve 5.2x asset turn.

We told this homebuilding company that we had worked with builders of all shapes, sizes, rationales, and arguments, and that processes like theirs were not just badly-designed processes;  they were the outcome of flawed thinking on how to best understand and satisfy the requirements and expectations of their chosen market segment, and craft a solution that satisfies the requirements of all of their stakeholders.

We told this company that velocity was a lot of what this project was about.  It was about finding ways to design better, more productive processes, in order to increase productivity and reduce cycle time.  We told them that processes were the logical starting point, the first step in the quest toward a “more-for-less” mentality – more output, more revenue, for the same investment in WIP and production capacity.  We told them that – given their distressed condition – this project likely needed to be about both margin and velocity.

We told them “there is a long road ahead . . . the start of an effort that never really ends;  the process of continuous improvement means just that: a continuous process of improvement”.  We asked them the same questions we ask every other builder with whom we work:  “Does the world really need one more average homebuilding company?  Will ‘average’ performance – operating, business, or otherwise – be sufficient to sustain a homebuilding company in the future?”

We told them that they were not an average homebuilding company, in either intent or reputation, but they were significantly below-average, in terms of performance.  We told them, as John Kotter phrases it, that their situation required a sense of urgency.  We warned them of the consequences of failing to confront the root causes of the problem.

We told them this was only a start.  Whether it was a good start – whether it would be sustained, whether it would produce the results it was intended to produce – was up to them.

That was 2006.  By 2008, they had filed Chapter 11.