The Saga of RB Builders, Part III: A New and Difficult Course

(The Saga of RB Builders is being presented as a nine-part series on Escape from Averageness;  editor’s note:  The Saga of RB Builders was actually written in 2007, and looks back from the imagined perspective of 2012.)

 

With this mutual understanding – with these mutual assurances and this mutual trust in place – the intrepid, results-based consultant began by helping RB Builders understand (and confront) the facts of their current reality, starting with an objective analysis and assessment of the company’s current performance, resources, and capabilities, and its current limitations and constraints, followed by an analysis of the chain of events and factors that had led to that condition.  The Current Reality Assessment was completed within a matter of days.

She then challenged RB Builders to chart a new and different course, one that would focus on improving the outcome in a single, pivotal measure of business performance, a measure that affected a range of issues (like pricing, direct costs, and productivity) and had implications for every home RB Builders built and sold.  The intrepid, results-based consultant allowed that there were a lot of important measures of operating and business performance, but she suggested that RB Builders look at a measure like Gross Income.  She recommended that the company start by establishing a baseline that represented the performance the company was currently capable of achieving, and then target a new level of performance that was considered ‘beyond current capability’, but would be possible, with sufficient urgency, intensity, focus, and motivation.

The company and its owners weighed a similar measure (Contribution Margin) before concluding that – while either measure would work – they would use Gross Income.  The current baseline performance was referred to as the Gross Income Baseline (GI Baseline), while the new target was dubbed the Gross Income Target (or GI Target).  The difference – the gap – between the GI Baseline and the GI Target was referred to as the Gross Income Reserve (GI Reserve), and it would become an important part of the new plan.

From their new-found perspective of current reality (as viewed from their new-found understanding for how systems work), a GI Baseline (2007) and a GI Target (2008) emerged (Table 1, below).

Table 1 (capture)

Prior to the adoption of its results-based approach, RB Builders had a mental model that was a “more-for-more” proposition, wherein the answer to more revenue and more output was more of everything else – more capacity, more resources, more plans, more steps, more reports, more money, more starts, more work-in-process.  What the company really needed was a mental model that was “more-for-less”, a way to produce more revenue/output with less of everything else – less waste, less rework, fewer non-value-added steps, fewer (but better) measures, fewer resources, a smaller (but more intelligent) plan portfolio, less capital (debt and equity), and less work-in-process.

So – one of the necessary conditions that the owners of RB Builders placed on signing-on to the results-based approach was tight control on both the amount of assets and the cost of production capacity – neither work-in-process nor Operating Expense would be allowed to rise above 2007 levels;  the company would have to meet its GI Targets without any additional work-in-process or overhead (and without any additional equity or debt).  At the same time, the owners made it clear that they preferred to utilize the existing investment in production capacity, not cut it.

As business outcomes – profitability and economic return were more important than Gross Income, however (in terms of cause-and-effect), it was Gross Income that drove profitability and economic return.  The focus on Gross Income (as the driver) could not come at the expense of either Net Income or Return on Assets (as the outcome).  So – a positive impact on Net Income was another requirement for the owners of RB Builders signing-on to the plan.