An all-out company Christmas bash last month might strike you as excessive, especially as a cold, dark winter of discontent likely lies ahead for home builders of all stripes in the United States. Demand for new homes barely pulses toward year-end, and single-family permit numbers take a nosedive to pre-2002 levels, so a six-digit budget for a Yuletide extravaganza hits anyone's bottom line with quite the thud this year. Still, employees, spouses, senior executives, and administrative staff partied like rock stars at the JW Marriott in Houston, where Royce Builders hosted a casino-themed holiday gala on Dec. 2. When most companies are busy trying to fix what's gone so wrong, Royce rolls right along, reveling in what it's doing so right.
The year 2006 won't enter the nation's 56th largest home builder's annals as the year the music stopped when the bubble popped. Rather, the opposite. The past 12 months have done nothing so much as validate the helmsmanship of CEO and president John Speer, who applies an accountant's discipline and a logistics expert's instincts as he minds the heart-and-soul of the company's strategy: its land position.
And, while many builders either paused or reversed their stated strategies as month-to-month cash flow management and balance sheet drills took precedence, Royce stuck to its plan, looking at profits on a per-house basis as always.
Many slid feet-first into the correction, dismayed by its force and steepness and disoriented about its ultimate toll. Not so Royce, whose brain trust operates as if each speed bump, detour, and traffic disruption were anticipated, both near-term and on the horizon. Calmly, they focus on executing, Determinedly, their map spreads a broad swath in the triangle of Houston, San Antonio, and Austin, Texas, and along a corridor that encompasses Atlanta and Charlotte. Never mistake Team Royce's poise for arrogance. They're unlikely to boast, and they're not ones to make a lot of how different they might be from competitors. What's clear in their approach to the business is that the pencil rules. Finance–not sales, marketing, nor operations–ultimately sets the agenda.
Its rationale: Market conditions notwithstanding, Royce doesn't change the basic disciplines of how it goes about evaluating the viability of land deals, looking at new business opportunities, and exploring new market entries. What has changed is Royce's opportunity. Now when everybody else is looking to sell–especially the publics–Royce just very well might want to buy, because its plans call for it and its metrics support it.
Reinventing The Wheel
Its "council" set in motion a seven-step process (see "Dirt Path of a Land Opportunity," above) that subjects each potential parcel to the rigors of a proprietary evaluation tool Royce refers to as its Wheel of Fortune.
Although the data that flows into the document is intricate and voluminous, what flows out is a simple, one-page, color-coded info-graphic that maps precisely where the land acquisition group–a separate operating company, Park Lake Communities–should be looking at dirt and why. Key indicators on what products will work, the size of each community, and when to bring it on line–a projection granular to the lot level–are included. The wheel filters the tons of raw data into a simple visual guide to Royce's operational plan. Then, only as a second step, does Park Lake go find deals.
Despite the unwieldy number of participants, the group moves decisively on prospects that map to their model, and passes on those that fail to measure up to the wheel's standards.
So, each Wednesday, the group goes one by one through deals that have already met the wheel's criteria, roughly four a week. Half of those normally merit a closer look.
This phase is like due diligence on steroids. The strategic analysts assemble a tome of information from a variety of resources: the Internet, insight into competitors, plats on up-and-coming projects, maps, product pictures, aerial photos, and third-party market data.
Revenue requirements are a critical component as well. As a final step, a strategic analyst walks the parcel. After all the hard data is compiled, it's fed into checklists against internal department data, analyzed, and a grading system is applied–one star being the lowest and five stars being an ideal prospect. The result: A two-inch binder full of logic to support the numeric grade.
"We don't just take the land acquisition department's recommendation and go with it," says McGinley. "By going through this exercise, we know what we are getting into or when to pass." And as land acquisition goes into the negotiation phase, they know exactly what needs to be done to up the star-power. "Sometimes a deal will rate as two-stars, but with a price adjustment, we know it automatically becomes a four star-deal," says Sorensen. "Our community preview exercise makes the negotiating very clear cut."
When the information profile is complete, the parcel gets added to the agenda of weekly land meetings for discussion. Company estimates are that about one in five of the deals that come under review wind up successfully negotiated and signed into contract. Here's where the strategic analysts re-enter the game: first, they communicate the deal throughout the company, so each department knows what is coming on line and can start planning accordingly. Then, analysts and department specialists begin an in-tandem drill-down, creating a community plan that eventually becomes the "living, breathing document" that gets a new community up and running.
Once again, the up-front details gathered in the community preview phase give strategic planning a jump start on the community planning process. With the knowledge structure in place, the evaluation and planning gets really granular, down to the house-to-house level. Jeremy Liardon, chief information officer, oversees each cost code meeting for every product line within a new community. "I tell my project managers they'll enjoy it as much as a root canal," he says. "But it forces you to deal with the brutal facts."
It's just one way Royce negotiates hard and looks at cost measures with its own proprietary yardstick. From a disciplined vantage point, the brain trust that lives in this scrappy idea factory may now be positioned to thrive.
Learn more about markets featured in this article: Houston, TX.