Fidelity's First-Year Scorecard

	In this 10th installment of our series on the startup of a home building company -- Fidelity Homes -- in Sarasota, Fla., Ed Caldeira, director of quality services for the NAHB Research Center, works with principals Todd Menke and David Hunihan to assess their company as it enters Year 2.

For many builders who seek a National Housing Quality Award, the most valuable part of the experience comes shortly after learning they haven't won a thing. That's when judging facilitator Ed Caldeira, director of quality services for the NAHB Research Center, gives a point-by-point assessment of where the judges saw strength and weakness. This objective review has a history of turning also-rans into winners where it counts most, on the bottom line.

Fidelity Homes principals David Hunihan and Todd Menke list winning an NHQ Award as one of their stretch goals, so we thought it would be enlightening to solicit Caldeira's assessment of the Sarasota, Fla., company after its first full year of operations, even though Fidelity did not submit an application. Caldeira's report is insightful but not as demanding of improvement as the builders' scorecard for what turned out to be a break-even 2001.

"We thought it was OK to not make money in our first year," Menke says. "That was a mistake. We set the bar too low. We did a lot of things wrong. We'll be much smarter in 2002."

Caldeira looked at Fidelity's management structure and operational methods to see how the firm stacks up against the NHQ judging criteria. But rather than a numerical score, he assigned grades of plus or minus -- a pass/fail system to indicate company strengths and areas needing improvement. Fidelity's report card is peppered with pluses, but there are a few minuses.

"Overall, Fidelity's ratings are consistent with other quality-driven builders," Caldeira says. "They are positioned to rise to the highest levels of quality management, but Todd and David are not there yet, and they know that without hearing it from me."

In every objective measure, Fidelity was close to projections the principals made entering 2001. For instance, Hunihan and Menke projected selling 30 homes and closing 20. Their final tally: 27 sold, 25 closed. They expected gross revenue of $3 million and reached $2.4 million. They targeted net profit before taxes of 11%, but without a projection to achieve it. Instead, they planned to break even. They hit the finish line with a margin of 1.3% before distributions to investors brought it to dead even.

The partners are on target to accomplish what they set out to do -- get in business the first year, stay in business the second, grow the business dramatically during the third. Still, they are not happy campers.

"At PB's Benchmark conference in Chicago, we had lunch with David Weekley," chairman of Houston-based David Weekley Homes, Hunihan says. "He took us to task for accepting break-even. He said we shouldn't go into anything unless we intend to hit a home run. He really opened our eyes."

	NHQ judging facilitator Ed Caldeira

Menke and Hunihan now believe that their biggest error in 2001 was a fuzzy focus on what to build and where to build it. "We've been opportunity-driven," Menke says, "so we're now building three distinctly different products. [Consultant] Scott Sedam told us we didn't have an identity, that we should figure out what we do best and concentrate on one product. We now see that he's right. That's another thing we'll take care of this year."

Both of these criticisms show up, independently, in Caldeira's NHQ assessment, along with many others, but Caldeira emphasizes Fidelity's underlying strength, especially in NHQ's first judging criterion.

Leadership
"This is a plus that will help Fidelity mature quickly," Caldeira says. "There's good alignment of the organization toward a common purpose. Todd and David are both strong leaders, which is important in a small organization. Without policies and procedures in place, employees make decisions based on the values, mission and vision defined by leadership."

Echoing Sedam's criticism, Caldeira warns that while Fidelity's mission and values are articulated well, the long-term vision of what the company will become is not. He also says there's a shortage of basic policies to support values and key business drivers. "A good example," Caldeira told the Fidelity principals, "would be Ken Neumann's policy that a home should never be closed without being 100% complete unless the team does everything in its power to make it complete. That's a condition of employment in Neumann Homes, a past NHQ winner. Policies like that bridge the gap between key business drivers like product quality and home buyer delight and the day-to-day operations of the company."

Caldeira also suggests that Fidelity's customer surveys (just begun) include questions that will reveal buyers' assessment of where the company stands on such issues as integrity and trust. "If buyer perceptions don't come back in alignment with values, vision and key business drivers, Fidelity needs to know that now, so it can be addressed quickly," he says.

Caldeira lauds Fidelity for the many ways that strategic plans are tied to key business drivers, but he warns that Menke and Hunihan seem to have bitten off more than they can chew. "There are too many items in the plan for 2002," he says. "The focus should be on achieving a few important things very well. First and foremost, they should be taking care of sales."

That criticism hit home, but it was one the principals had already addressed. "We've both gone back into the sales office," Menke says. "We had to after September 11. That shock put us in survival mode. We lost one contract in September, and traffic dropped dramatically for six weeks. Fortunately, traffic began to come back in December, and now it looks like we'll have a pretty active selling season in Florida this spring."

Caldeira advised Fidelity to put off plans to launch a major trade-partnering initiative this year because construction quality is not really a problem. "It's not a threat," he says. "Quality is perceived to be high, and Fidelity is delivering homes on time. There are better opportunities for field personnel to affect customer satisfaction, such as placing special emphasis on securing delighted customers by managing their experience during construction."

Hunihan, who now actively manages all construction operations in the field, has taken that suggestion to heart. "We had been planning to implement a full trade-partnering program during 2002, but we'll now put that off in favor of improving our own company's performance in scheduling, communication and punchlist procedures," he says. "We want to have a zero punchlist a week before the final customer walk-through."

Independently aligned with Sedam's thinking, Caldeira suggests in his feedback report that Fidelity refrain from opportunistic land deals and consider restricting future operations to "villa" (single-story attached) product. The partners had already made that call. "We've decided to become the villa kings of Sarasota County," Hunihan says.

Menke adds: "We believe we can close the gap between our product in downtown Sarasota and what we build in North Port. With high demand for in-town housing driving land costs higher and higher, the downtown Sarasota market is going to migrate toward luxury attached homes at higher densities. We want to be there with the product to meet that demand.

"In North Port, our current single-family detached development is taking off. We believe we'll do well there this year. But we won't pursue future single-family locations. We'll stick with attached villas instead."

Customer Satisfaction
That line of logic leads directly to the next NHQ judging criterion, on which Caldeira has this suggestion: "Product development relies too much on anecdotal information. Fidelity should set a higher priority on improving product value by selecting features that marry high value to lower cost. Consider gathering factual data on features through formal interviews with existing homeowners or even survey questionnaires."

Hunihan and Menke are mulling the possibility of taking such data a step further than anyone has tried in Fidelity's Sarasota County markets. "We'd like to use the last villa building in each development to prototype new features and components for future developments," Hunihan says.Menke reasons, "The last building in a development will be free of debt, so that's the place to test buyer response to new designs, features and products."

Caldeira also warns that Fidelity does not do enough to choreograph buyer contacts during construction toward the customer delight the principals want to achieve after closing. "For each contact point, define a customer relationship objective and an operational one," Caldeira told them. "For instance, the operational objective of a pre-drywall walk is to verify that all options and placements are accurate. The customer relationship objective would be to instill satisfaction with the company's attention to detail and quality, and to manage expectations for the remaining phases. The construction super or whoever does that walk needs to understand the dual role of the contact."

Human Resources
Of the remaining NHQ judging criteria, only human resources generated significant recommendations from Caldeira. While the page was speckled with eight plus signs and no minuses, Caldeira's report warned the partners to refrain from opportunistic hiring. "A small organization like this can't afford to make mistakes. They need to make sure their hiring process is driven by organizational development needs and that every hire matches company values and culture."

That criticism hit the bull's-eye, Menke and Hunihan admit. They blame themselves for making bad hires on the sales side last year. "They were not good matches for us or for the people selected," Menke says.

Hunihan says: "We really see now that psychological profile testing is one thing that we haven't done but should in the future. We got away from the process we always used when we worked in a larger company. Looking back, it was really dumb of us, but in a startup company it's easy to lose perspective and become reactionary rather than proactive."