Our conversation is with Margaret Whelan, Founder, and CEO of Whelan Advisory, a boutique investment…
Imagine that you were lost in the Arctic for months, or 7 years as the case may be. It has taken every ounce of your strength, endurance and resources to make it back to civilization alive, barely. You have lost members of your party along the way, have learned to live with less of everything that you require to survive and have had to fight for your very existence from the time you wake up in the morning until you lay down at night, snatching periods of restless sleep in between listening for polar bears. Now you are home at last! You can relax and enjoy the hard earned rewards of survival: food, shelter, warmth and security. Except you arrive home to find that your home belongs to someone else, the grocery stores are low on food and you don’t have enough money to put gas in your car.
Sound extreme? Or does it feel familiar to some of you out there? In 2007, while helping a client in the building product space test the durability of its organization and strategy by measuring it against various possible future scenarios for the homebuilding industry from then until 2012, I proposed a “worst case” scenario that we named “New Ice Age”. At the time, most of the executive team refused to even consider this scenario — it was so bad that it seemed impossible. As it turns out, it was off the mark… it was too optimistic by 25%!
So here we are, back in the present. Demand came back in 2013. The demand for new housing began to rebound in many markets in 2012 but 2013 saw a more significant resurgence across most key primary and secondary markets with the exception of some areas of the country that have been experiencing structural economic challenges above and beyond the great boom and bust of the last decade. This rebound, which has actually been relatively modest from unit and percentage gain perspectives, has stressed the industry resource base across all aspects.
This stress reflects a multifaceted set of challenges that are the legacy of the severity of the last business cycle. Builders, particularly mid-sized private builders, are faced with a new, more challenging and risky growth environment. While growth opportunities abound, many mid-sized production builders are like the wayward explorer returned home to find that his world has changed while he was gone. The resources that were plentiful in the prior expansion period are now scarce, expensive or simply gone: capital, staff, trade contractors and lot inventory are all less available today than they were in the past.
In this harsh new environment, the large organizations appear to have the advantage. Public builders are able to access public capital markets to fund expansion, can afford to pay more for top talent and can offer trade contractors larger chunks of work so that they can manage their businesses more efficiently. Differences in capital cost, availability and the need to push volume are fueling land buying binges and acquisitions of mid-sized builders in various markets across the country. When mid-sized builders sell to large builders at the front-end of a cycle, they rarely come close to maximizing the enterprise value.
So, what do you do if you are a mid-sized homebuilder who wants to stick around to capitalize on the next expansionary cycle in the US housing market? How can you achieve profitable growth in a resource-constrained business environment?
Continuum Advisory Group and Continuum Capital will be releasing a series of brief articles over the course of this year to help you think about how to excel in this challenging yet potentially rewarding business environment. Our intent is to challenge your assumptions and get you thinking about how you and your leadership team will make the right calls to build your organization’s capacity for success and competitive advantage.
This series, titled “Survivor or Victim? How to Excel in a Resource-Constrained Environment”, will address what is arguably the most significant challenge faced by all homebuilders today: Human Capital. The lack of available and qualified people for hire within the industry will ultimately challenge your ability to execute in the short term and will remain the most persistent constraint on your ability to grow profitably over the next few years. We will examine various aspects and elements of your business, including the processes, systems and capital needed to overcome the severe scarcity of human resources.
People are typically viewed as the “soft side” of the business. Investing in people beyond the fully loaded payroll and benefits cost is something for good times or for large organizations. People are also typically viewed as a commodity to be purchased in a growth environment just like building products or office supplies. “Do we need to grow? Let’s hire another superintendent and a couple more sales people.”
Our way of looking at employees in homebuilding organizations is that they are actually one of the “hardest” aspects to making a homebuilding company sustainably successful. Investing in training, process improvement, assessment and evaluation, technology and tools that help improve your staff’s ability to drive more revenue per head, more gross profit per head, more starts per head, more closings per head, etc. is one of the most critical elements of any business plan. In today’s environment of persistent human capital shortages, how builders manage these investments will be the difference between success and failure.
The homebuilding industry lost approximately 400,000 employees from its peak in 2006 through 2013. In addition the trade contractor base lost close to 600,000 craft workers and approximately 75,000 companies in that same time period. This contraction is unprecedented in the modern residential construction industry. The result is that the existing industry capacity for growth is constrained by the availability of qualified and productive people at all levels.
Historically, homebuilding companies have tended to maintain relatively consistent processes as business cycles rise and fall, using headcount scaling and reductions in force to manage capacity on either side of the cycle. Based on the current industry staffing levels, it is very unlikely that homebuilders will be able to “Hire their way to Growth” in this current expansion cycle.
Our series will explore several core operational areas that will demand new processes, procedures and systems in order to increase output per head so that homebuilders are able to grow production capacity at a faster rate than they grow headcount. The builders who understand and embrace the current constraints, we’ll call them the “Survivors”, have an opportunity to separate themselves from competitors who believe that they can operate on a “business as usual” platform, the “Victims”. Growth and scarcity create the conditions for industry leading firms to achieve step-change performance in comparison to their peers.
We invite you to examine our point of view, challenge your thinking, challenge our thinking and ultimately prepare your organization to be on the positive side of this coming industry divide of “Survivors” and “Victims”. We welcome your criticism. We welcome your feedback. Whatever your perspective, we welcome your engagement. Now that you are back from your odyssey, it’s time to get to work!