A few months ago, I was called by a banker who had inadvertently become a home builder. Basically, he wanted to know if a builder could possibly make money going forward in this market. I offered a two-part “problem and solution” that I have repeated now to hundreds of industry people during individual discussions, small group meetings, presentations, and keynotes. Part one says, “From 1991 to 2006, 90 percent of the money made by 90 percent of the builders was realized in two ways—land appreciation and price inflation.” I have yet to be challenged on this assertion. All I get are sighs and nodding heads.
I cannot think of one other business with relatively small barriers to entry where the only requirement was to get your product out by any means, then count your profits as the market drove up the values of the biggest component (land) and the sales price. This may have been a unique period in American business history, and we rode the wave to its devastating conclusion. Toward the end of the wave, however, the words of an old mentor of mine 20 years ago, Dave Ebling, kept haunting me. Dave, better known as “Eber,” was a straight-talking, chain-smoking scotch drinker with a gruff exterior, big heart, and unique role for one of the largest national builders. When a division president left or was fired, Eber would camp out at the local operation for a few months and pick up the pieces, patching it up until a new team arrived. He had seen it all.
Once, I returned from a field trip and was ranting about the gross inefficiencies in one of our fastest-growing operations when Eber cut me off. “Listen Scotty,” he said, “growth and volume cover up a multitude of sins. When the growth stops, you find the baby’s ugly.” Eber stated convincingly that he had never seen a single exception to this rule. As the consequences of our industry excess have emerged front and center the past two years, Eber’s Law has proven out in company after company, industry after industry.
Haunting, indeed. Most analysts project 2010 or even 2011 before we see one million closings again, while changes in the mortgage and funding arenas ensure that except for brief periods in unique markets, we’ll never again experience the growth levels of 2000–2005. So what about the two sources of profit cited above? After massive deflation, land prices are beginning to stabilize, but no one expects significant appreciation in the near term. Depending on the pace of foreclosures, house prices may or may not have bottomed, but meaningful price inflation is likewise doubtful. The solution to profits as we work toward a recovery is as easy to say and hard to do as part two of my statement that day to our banker/builder, “Going forward from this crisis, the builders who make money will be those who learn the true meaning of operational excellence.”
During the years of unfettered expansion, operations took a back seat to marketing and even more so to finance. It was all about manipulating minds and money. As you might guess, my definition of what operational excellence looks like is quite different from the home building industry standard, and I hope to provoke you by stating unequivocally that 99 percent of home builders don’t get it. We had neither time nor patience during the glory years to learn a higher level of playmaking, blocking, and tackling, the kind of consistent execution that produces great product, on time, with little or no waste in the process while leveraging the knowledge of those who do nearly all of the work of our companies—the suppliers and trades. Most of what was understood departed the consciousness of home building in the brains of those who have been retired during the crash. Eber’s Law is inviolate. Our baby is ugly. Do we have the guts to learn again how to be good operators? That’s exactly what it will take to prosper during the recovery. I can promise you it will be just as painful as surviving the crash with one important difference. Those who relearn the art and science of operations will reap the rewards.