Opportunity Lost

About a year ago, I commented to two homebuilding clients – somewhat offhandedly, first to one, then to the other – that they ought to find a way to collaborate with one another. At the time, that recommendation was not the intended outcome of any of the work I was doing. It just seemed to be a suggestion that made sense, particularly under the circumstances, and with the two companies involved.

They are both strong companies, with good business models, well-versed in starting and supporting geographically-dispersed homebuilding operations. The principals are respectful friends. The two enterprises share some geography, but do not directly compete. They are very different, but that was what made it work. Their attributes complemented one another – remarkably so, really – and those attributes offset whatever deficiencies there were.

In collaborating, neither enterprise had to give up anything that was worth keeping.

The two operating systems were a reflection of the business models and temperaments of the two enterprises, a reflection of the different natures of the homebuilding the two enterprises did, and a reflection of the differences inherent between the long-time licensed use of third-party software, and the long-term development of proprietary software. In that last regard, it was a revealing comparison between a system that made very effective use of purchased components, and a system that was purpose-built. It was a picture of functional, workable-but-forced integration versus elegance-at-a-cost.

The systems comparison is almost a story, in and to itself.

The larger story is about two homebuilding companies, so complementary in their attributes, that, in my estimation, they could not possibly have been better served maintaining separate platforms at the expense of remaining smaller, more vulnerable enterprises. Two completely compatible companies, confronting realities that this arrangement would have addressed, with no discernable negative consequences. Two companies that, nonetheless, chose not to move on the opportunity.

Opportunity Lost.

Not for lack of thought or consideration. There were meetings. There were systems overviews. There was a recommendation. There were broader discussions. It just never went anywhere. That, however, does not change the validity of the thinking behind what would have made it work so well, which went as follows:

In helping them with the systems analysis, I was struck by the amount of resources these two separate systems consumed, and the amount of energy required to run them. I wondered whether either company was getting out of their systems anything close to the benefit they should have been getting. I wondered what the “energy/benefit ratio” was, wondered about the relationship between the amount of energy expended on a system, versus the benefit derived from having expended it.

Energy Expended v. Benefit Derived. I wondered about the resulting Return on Investment. I wondered about scale.

Neither of these systems was being leveraged to the extent they could or should have been. The economic conditions and state of the housing market that had atrophied these two companies clearly had a lot to do with the extent to which the systems were being under-leveraged. Those conditions have not abated. But, it is also fair to say that, historically, the respective investments have never, ever been exploited the way that they could have been.

These systems were capable of supporting more users, more building operations, more business. The systems had unused capacity. Since they both had unused capacity, it was also pointlessly redundant. The unused and redundant capacity was muda. It was pure waste. In a way, it characterizes the waste and redundancy associated with working within the fragmented value stream and supply chain that is the homebuilding industry. More than anything else, unused, redundant, unmanageable capacity distinguishes this value stream.

The waste – the muda – existed in both companies, but consider just one example:

The licensed use of third-party software incurred fees. Not an issue with a proprietary system, but the fee-only cost to the client with the non-proprietary system amounted to about $250,000 per year, despite the fact that the fees had been cut to the bone, in terms of extra seats, etc. That cost would certainly increase in future years. At a three percent (3%) franchise fee, that $250,000 in fixed overhead cost represented more than $8.3 million in franchisee sales revenue that had to be generated, just to pay the licensing fees.

All systems require attention. At some point, that attention becomes a distraction. At some point, attention and effort is distracted from other areas. The under-utilization of the system is waste that creates the added waste of being distracted from other, more important areas. My two clients – my two friends – needed to be asking themselves how much this distraction was worth, and whether it would have been a better decision to leverage the burden between their two enterprises.

I pointed out, as emphatically as I was allowed to, that both of these enterprises should have been looking for opportunities to leverage the investment they had in their systems, and that they could certainly have done with utilizing a single platform, in terms of an operating and information/technology system that would have met both their needs. But, it was more important than that. My contention was that these two enterprises would actually have been far better operations for having done so.

I made a business point to my two clients – my two friends – whom I have always held in deep respect, for their business judgment.

I pointed out, as significant as it was, that leverage was about more than the investment of capital or the expenditure of overhead. It was also about the aggregate distraction caused by the attention to two separate, under-utilized systems that impacted both companies, and that kept them from getting to where they both wanted their enterprises to go.

I pointed out, that what was at stake was the far greater opportunity to create and benefit from a larger, stronger, heavier footprint.

Opportunity Lost.

One Comment

  1. Comment by doug coons:

    Fletcher, good to hear from you. Interesting story that I imagine is happening all over the country as this business is being ransacked. You may remember that my partner (Tom Bradbury() and I developed an integrated software system from the internal system his old company developed and were in the market trying to convince builders there was a better way to run a home building company. Well, as you might imagine, we really aren’t in the software business any more since the market has decimated the number of operating builders and made discretionary investments in software and processes out of the question. So we decided to get back into the home building business and utilize our software system as a competitive advantage. But the real story is how this capability allows us to scale our operation, up or down. The effort is upfront loading take-off data, but once this is done, the amount of effort and therefore the resources required to run the business has been optimized and minimized. We co-own a software company of 3 people that each of our operating building companies (we have 4 operating LLC’s and growing) outsource there systems and back office to. We are confident we can scale our operating volume to over 150 starts with just 3 people in the systems and back office function. Each operating company pays the software company a per start fee for the software (which is hosted and delivered via the internet) and the back office functions – cost management, reporting, scheduling, purchase order management trade management, and accounting. Each operating company then can focus on selling, building, cost control/reduction and customer service and has vairable staff per community – sales agents and builders. It is working very well and our overheads are miniscule and our direct costs are competitive with any national builder – we are by definition using lean production techniques and our waste is very small. With a very effective PO management system in place, not only do we control costs but are constantly reducing them. In addition our contract to close is less than 60 working days. Doug in Atlanta