Lessons Learned From a Downturn—Can They Help Us Next Time?

Whenever I see George Casey’s name pop up, Johnny Cash’s classic country hit “I’ve Been Everywhere” comes to mind. Of the 90-plus cities and states named in that tune, it seems like half of them appear in George’s resume, as detailed on his LinkedIn profile. I don’t know anyone in the industry who’s had more substantive positions with more builders in more locations than George Casey, including senior roles with Toll Brothers, Realen, Zaring, and The St. Joe Companies. He’s also served as a board member for many firms, both private and philanthropic. He’s more than earned his chops.

Fifteen years ago, George rolled up all that experience into Stockbridge Associates, a well-respected real estate consultancy. He has suspended his operations there several times to accept longer-term assignments as a senior leader for companies undergoing major change requiring full-time attention.

My July 2019 column, “The Next Housing Downturn—Is It Too Late to Get Your Business Ready?,” reviewed the results of Zillow’s two most recent annual surveys of 100 real estate and home building experts, which both predicted a housing industry slowdown of some significance for Q1 2020. My column focused on three specific things the best builders are doing to improve margins today and prepare for the possible downturn, namely, reducing variance, simplifying product and process, and decreasing cycle time. Then, I asked builders who survived the last crash what they recommend today and combined their input for my column, “Survivor! Home Building Edition.”

Among the responses I received, George Casey’s was so comprehensive and thought-provoking that I decided to feature it here in its entirety. As is his always-learning nature, George offered this outline on what he learned from the last recession, with an appeal to others to further develop his prescription for tougher times. So for those of you wondering “WWGD?” (What Would George Do?), here’s your answer.

1] Little things help encourage employees

George listed this one first, and there’s a message in that. When I look back over my own 30 years working with countless home building executives, the best ones instinctively pay attention to the so-called little things that keep spirits up, even in down times, while the worst don’t give them a thought. What are the little things that employees appreciate? You can probably think of a few, but the best source is to ask those you trust, at all levels in the company. Some suggestions may leave you shaking your head, but do them anyway. I’ve always been amazed how excited Texans get over a few boxes of tacos from Taco Cabana (get the brisket, trust me, get the brisket!), and I once saw a mob of freezing people in Boise lined up for a fleet of Friday food trucks, smiling all the while. Here are four little things that George employs:

• “Way to Go” employee recognition

• Margarita Friday

• $50 Safeway card for Christmas

• Brown bag lunch (employee communication)

2] Find reality and deal with it

I worked for an executive years ago who frequently used the phrase “On a need-to-know basis!” Conservatively, three or four times as many people needed to know than he believed, and there was no end to the confusion that resulted. Another senior manager in the same company observed, “In the absence of information, people make up their own.” That’s exactly what they did, and it wasn’t pretty. Here’s George’s advice:

• Communicate reality to employees (brown bag lunch)

• Let banks know your strategy, frequently and in writing

• Figure out your “elephants” and micromanage them

• Hard “in your face” reality is better than rumor any day; most employees probably know the truth anyway

3] Cash is king in preparing for an economic slowdown

If you’re thinking this point rates as a big “Duh!,” there were literally hordes of builders, suppliers, and trade contractors who violated this basic principle in preparation for the last slowdown and paid the ultimate price. And as we learned from JayMarc Homes in my September column, that cash should also include provisions for keeping your staff going as long as possible; otherwise, you’ll start the next recovery in a hole. George recommends:

• Manage cash two to three times per week

• Learn to be more inclusive in cash projections; express them in different and better viewpoints

• Share the pain with vendors sooner than later

• Always keep a cash reserve

• Cut spending fast

• Institute tighter controls

4] Focus on sales management and value enhancement

No one expects the next downturn to be anything like the last big crash. With all the unfulfilled demand out there, we could drop 20% or more and still sell a million units. To follow the advice of “the best defense is a good offense!” from Bill Saint of Classica Homes, your sales team has to be top drawer in every way. George’s observations include:

• “Shy salespeople have skinny kids”

• “Today could be the last day to sell a home” mentality

• Stage completed inventory homes

• Add big landscape enhancements; front and rear yards

• Value-enhance rather than cut price

• Measure conversion rates

• Work the 7 P's (product, price, place, promotion, people, process, presentation)

5] Prepare for an economic downturn by knowing your numbers

I’m a bit of a numbers freak. I not only enjoyed statistics in college, I took stat courses beyond the requirements. To most of you, that’s just weird, but I have written more columns on measuring and “counting” than I can remember—because in general we aren’t that great at it. George’s final point below, breakeven, was of major emphasis in my July column.

Adding to his list, I’d also highly recommend an even stronger focus on key process measures, such as new community start-up, cycle times of every phase of the business, and variance levels.

• P&L

• Cash

• Market comps

• Gross and net margins by house

• Starts

• Spec limits (internal and bank)

• Breakeven (cash and income statement)

6] Find out who you want in the foxhole with you when the economy slows

A downturn can be very much like a war, with builders competing for scarce resources (buyers), everyone taking shots at you, and having to track, measure, and manage all the variables that can make or break the company. It’s not life and death, but it feels like it sometimes. So, take a moment, think ahead, and ask the tough question: If push came to shove—a slowdown became a genuine downturn—who would you absolutely, positively want there with you as you fight the good fight? Identify those folks now and make sure they understand their value and your commitment to them. That will earn their commitment to you. George advises:

• Experience helps

• Value flexibility and the willingness to take on new assignments

• Performance matters, not just talking about it

7] Have a bias toward action when preparing for an economic slowdown

So many builders and individuals fall victim to inertia, working the same habits, systems, and processes. I’ve experienced this myself, occasionally suffering from “analysis paralysis,” and it can be hard to break through to a new plan. The admonition to “Don’t just stand there, do something!” always feels good to say, yet it has led to some massive errors in judgment. You’ll also hear, “Don’t do something, just stand there!” as a warning to consider very carefully before charging off in a new direction. There are mines buried out there, but George challenges you to:

• Change the organization

• Find value enhancements

• Establish realistic pricing

• Don’t hesitate to make needed cuts

8] Strong processes win out in good times and bad

With each new year comes another study describing home building’s dismal failure to keep pace with the massive productivity gains found by most industries since the end of WWII. That failure is all tied up in antiquated and ineffective processes. Almost daily we read a new article, blog, or social media post extolling the miracle promise of off-site home construction.

We will (and absolutely have to) move in that direction, but let’s not forget that at least 25% of the average new-home sales price is tied up in process waste. After more than 200 lean process implementations, we have the data to prove it, and George agrees. There is so much we can do now to boost margins, secure the trade base, increase the sanity level in our staff, and improve quality before the perfect off-site outfit comes to town.

Pursue process maniacally across the board, and George’s list here is a good starting point:

• Review your purchasing processes

• Renegotiate everything

• Prioritize cycle time control and improvement

• Control your starts

• Frequently check market comps

• Review and streamline IT applications

9] Don’t be afraid to change the organization in a downturn

The organizational structure that worked for you in strong times may look quite different from the one that works in a downturn. Do you still have, as Jim Collins described in his seminal work Good to Great, the right people on the bus and in the right seats?

The key message from George’s list below is to reexamine exactly how your company needs to operate in your current environment, then organize your company around that in a very intentional way.

• Reset local project management structure

• Eliminate divisional structure

• Organizations do the things they’re organized to do; find the bottleneck or opportunity and organize around it

• Focus on cycle time

• Close out jobs in process

• Eliminate sitting inventory

10] You can’t cut too deep too fast when the economy slows down

This one makes me nervous. What happened from 2008 to 2012 was not a downturn, it was an all-out crash. As I said above, at this point no industry experts or economists are forecasting a repeat of that debacle. It’s true that most builders woke up one morning in 2010 thinking, “I was too slow to cut and should have gone deeper.”

My concern is the consequences of overreacting during a nominal slowdown or even a more significant downturn, but still short of a crash. How many good people who spent years learning your systems, processes, and products will you lose? Maybe it’s as simple as how deep your pockets are and how well you have prepared. That said, George has far more experience managing through downturns than I, so when your reading of the economic tea leaves triggers the warning light, heed his advice to cut deep and fast in:

• Land

• People

• Spending

• Production

Hard decisions have to be made; sometimes they’re personal.

No Time to Lose in Prepping for an Economic Downturn

George Casey is back to running Stockbridge Associates these days. He also chairs the Housing Innovation Alliance, a coalition of forward-thinking builders and product suppliers that has become one of the leading voices on innovation of all types in home building. Their in-person and online events are excellent, and I suggest you check them out. My sincere thanks to George for sharing his experience and wisdom for this column.

I also have an exercise for you and your team that I guarantee will yield results now and could be a major factor in how well you prosper in the next downturn. Email [email protected] and request a PDF of my three-column series “Preparing for the Downturn,” which includes this article along with the July and September columns.

And, if you enter “Downturn Prep” in the subject line, I’ll also send you step-by-step instructions on how to use the materials with your team to get them involved now in preparation. If the Zillow group of 100 experts is right and a slowdown of some significance begins in Q1 2020, you have no time to lose.