- Gridiron Gridlock: Sales & Marketing
- Equipment Check: Purchasing
- Loss of Yardage: Land Acquisition
- Time of Possession: Construction
- The Line of Scrimmage: Finance & Accounting
- Outside the Huddle: Information Technology
- Draft Picks: Human Resources
- A Flag is Down: Legal
- Top Executive Salaries, 2007
- Sales & Marketing
- Land Acquisition
- Finance & Accounting
- Information Technology
- Human Resources
Flashback to the human capital equation of the late, great home building boom opposite of today's residential construction arena, and there's only one conclusion to reach: To compare would be unfair. After all, a human resources officer's worst nightmare up until about 36 months ago was that there were not enough people to go around for all the jobs coming online as new-home building's hive seemed to expand hourly. In diametric contrast, restless nights now owe themselves to the opposite force–contraction–and the job of talent managers these days is a classic double-bind.
For the foreseeable future, HR managers and financial management colleagues are in the crosshairs of a sectarian reduction-in-force juggernaut that may eliminate two out of every five corporate jobs by the time standing new-home inventory peaks and starts and home sales trough during the next 12 months. At the same time–and more importantly–the real riddle of the moment is how to keep a few select good talents fully on board, even as the pink slips fly. Smart-size, or else.
Collectively, "big" home builders–who typically build and sell more than 100 homes per year–will be out more than $35 billion in revenue from their best years in 2004 and 2005. The challenge for home building company strategists–for whom cash flow management has shifted from dealing with a tough outlook to worst-case scenario triaging–is to dramatically cut costs without negating culture, reduce operational heft without sapping morale, and chop away at staffing layers of the past and present without compromising a company's future.
The last time the national Census Bureau tally of for-sale home sales dipped below 900,000 was 1997, and the top 100 builders–per Big Builder sister publication Builder research–owned a less than one-in-three share of the total market. Today, as the fever lines for starts, sales, and prices plummet to mind-numbingly low levels–some estimates are for single-family new-home sales to bottom at 600,000 annually–the high-volume home builder share of that remaining universe has grown dramatically, to upward of 45 percent of the new-home marketplace.
What this means is that, in the "new" new housing arena, entrepreneurialism and enterprise management have finally blurred and blended dramatically into one during the past decade. The entities most capable of withstanding either extreme of a real estate cycle are those that will most supply scale themselves to either expansion or contraction, retaining their cultural center along the way. Amid the gyrations of home building's upturn, downturn, and eventual normalization, two important realities emerge. One is that new-home building, while continuing to be an essentially local business at the property level, is increasingly a medium to larger company business, needing scalable organizational systems and processes to thrive.
The second emergent reality suddenly dawning upon home building's enterprise organizational landscape–from the corner office brain trust to a subdivision construction supervisor's double-wide trailer–is that the business is essentially not transactional in nature. Only on its surface is home building about converting horizontal assets into vertical inventory turns via an efficient manufacturing system. Only superficially does home building hinge on taking orders and deposits and the expectation that they'll lead reliably to the closing table.
In fact, one of the hard lessons of the times currently challenging home building companies to their very core is that, almost universally, they thought they were basically in the business of home building. Customers, as hard as they are to find these days, and the markets have let home builders know otherwise.
"The biggest shift we've needed to make in the past 18 months is recognizing we're just not in a transactions business," says Kim Shelpman, president and CEO of
Melbourne, Fla.-based Holiday Builders. "We've learned that we're really in a relationship business, and realizing that changes every part of how we work."
And why wouldn't it? As JP Morgan managing director Margaret Whelan was apt to say of the unsustainable peak cycle in mid-2005, "If you could fog a mirror, you could sell a house." By the same token, in that era of home lending practices, it also held true that if you could fog a mirror, you could buy a house.
It's no wonder then that the nation's leading home building organizations could hardly help believing that their businesses were essentially transactional–optimum capacity operators working to fill an ever-increasing demand.
If only all the people buying houses during those 36 blissful months between 2004 and 2006 had bought them for reasons similar to those of most people who bought houses for decades before that! Were that the case, then production home building would have mutated into a different species whose sole purpose was to operate at maximum capacity to keep up with a limitless need.
Alas, it was not to be. A much higher-than-believed percentage of home buyers during that three-year period were in it solely because money was so risk-free–and so widely available. Investors speculated, flippers flipped, and people who could scarcely qualify to rent an apartment bought a home, believing they would forever elude the moment they'd have to pay the piper.
Hurricane Katrina blew into such an environment in late 2005, and by the time the destructive Gulf Coast floodwaters finally ebbed, the false face of the housing market began to be exposed for what it was. The overbuilding and over-capacity suddenly became an overhang of months and months of new-home inventory, which just as quickly became a hangover that set in and still won't seem to let up.
Meanwhile, lack of affordability, tighter credit across all home mortgage options, the absence of investors, and the psychological pall that descended over qualified prospective home buyers changed home building business operations from a no-huddle offense to a goal-line defense, and changed selling from rather impersonal order-taking to highly personalized hand-holding at every level.
What's happened in the past 12 months, and what will continue to happen during the next 12, will reflect leading home builders' collective awakening to the need to transform from the transaction mentality to the relationship mentality. Putting that relationship mentality into central focus in an organization will clarify which of the fewer associates should stay on to carry the culture of a company forward past the current slowdown.
"When you're dealing with someone who's really going to live in your house, as opposed to buy it and then flip it a few months later, it brings up a whole different set of issues in customer care, satisfaction, and service," Shelpman says.
What's more, sales and marketing are not the only disciplines within the enterprise that now demand a radical makeover. In a falling-knife environment as regards land prices and positions, land acquisition strategies focus more on terms renegotiation and less on out-bidding rivals for every tract that comes to market. It will be relationships with land sellers that may mean the difference between a re-penciled pro forma that shows a profit versus a re-priced product offering, or yet another land impairment or walk-away.
And in the very near future, it will be those relationships that will yield insight into the inevitable pennies-on-the-dollar opportunistic buys that will start cropping up when absorptions get steady enough to restore visibility and put forecasts on terra firma. Purchasing, too, has needed to turn itself inside out, drawing on skills that seemed completely off-the-radar for sourcing executives during the super-capacity days of simply trying to get goods and materials to sites by hook or by crook. It's the relationship that can lead to more favorable terms–not just on unit prices, but on total cost and value as well. And it's the relationship that ensures timeliness and precision in the deliverables that can make or break a closing in today's jittery market.
Among the biggest home building organizations, one of the most critical shifts from the transactional mindset to the relationship mode has needed to occur at the division leadership level. One of the most significant disconnects that has lead to widespread pain among enterprise home builders is the breakdown in the communication of intelligence at the submarket level to divisional and regional managers. The result: too much land at too high a price.
What follows is a discipline-by-discipline look at the talent dynamics of high-volume home builders as they transition from transactions to relationships, and from either an enterprise culture or an entrepreneurial culture into both at once.