Disruption in the Homebuilding Industry

WILLIAM J. FERGUSON Chief Executive Officer, Ferguson Partners

TRAVIS KONONEN Managing Director, Ferguson Partners

DISRUPTION IN THE HOMEBUILDING INDUSTRY

2

Homebuilders may be enjoying the housing

recovery, but many are still beset by high costs

and productivity killers like inefficient supply

chains and slow technology adoption.

The McKinsey Global Institute report Reinventing

construction: A route to higher productivity,

estimates that simultaneously targeting

challenges such as “rethinking design and

engineering processes; improving procurement

and supply-chain management; improving onsite

execution [and] infusing digital technology” could

push productivity up by 50-60%.1

Disruptors are taking aim at these opportunities to

propel productivity. In the process, they’re changing

the way homebuilders do business – and the skill

sets executives and board members need.

Let’s take a look at two major disruptive influences

in the industry and what they mean for board and

executive recruiting.

Disruptor #1: The Pre-Fab Renaissance

Also known as modular or factory-built homes,

pre-fab structures are manufactured off-site

in standardized sections that are shipped to

the job site and assembled on-site.

The process is faster and less expensive

than stick building. The building sequence is

streamlined because site preparation can be

done while components are being made, and

1 https://www.mckinsey.com/industries/capital-proj-ects-and-infrastructure/our-insights/reinventing-construc-tion-through-a-productivity-revolution

multiple rooms can be placed and finished

simultaneously. Since crews assemble largely

complete units on-site, often in a few days or

less, there are fewer delays from weather or

materials delivery hold-ups. Fewer days on site

lowers security, utility and GC costs and fees.

Industry analysts are bullish on the pre-

fab market, which has global revenue of $8

billion and 5.2% annual growth, according

to IBISWorld research.2 Yet American

homebuilders are not yet capitalizing on this

market opportunity. When the Associated

General Contractors of America surveyed

members in 2016, a scant 13% were making

investments in modular.3 As a result, pre-

fab structures account for around 2% of new

single-family homes.4

These market fundamentals and data illustrate

a promising new product line for homebuilders

with vision and strong leadership.

The move to modular meets three key needs

for the industry:

1. Cost Efficiency. Early adopters report that prefab structures cost

between 10% and 50% less than site-

built stick-built homes.5 Research

from the Terner Center for Housing

Innovation at the University of

2 https://www.ibisworld.com/industry-trends/market-re-search-reports/manufacturing/wood-product/prefabricat-ed-home-manufacturing.html

3 https://www.marketwatch.com/story/the-construction-industry-has-a-productivity-problem-and-heres-how-to-solve-it-2017-03-04

4 https://www.census.gov/construction/chars/pdf/con-method.pdf

5 https://www.cnn.com/style/article/prefab-homes-new-living-design/index.html

FERGUSON PARTNERS | 3

California, Berkeley, found that

savings are largely attributable to

lower labor time and expense.6

2. Materials Savings. Because components are standardized,

builders can purchase several

modules directly from the

manufacturer for use within their

project portfolios, leveraging

economies of scale and reducing

costs of subcontractors.

3. BIM Benefits. Nearly three-fourths (72%) of U.S. construction firms are

already using BIM to control costs.7

Deploying BIM in pre-fab building

supports more efficient prototyping,

workflow coordination and quality

assurance, all of which speed

planning and production, reduce

costly errors and produce less waste.

What the Modular Renaissance Means for Board and Executive Recruitment

A pivot to pre-fab likely means a dramatic

evolution of the standard business model and

organizational capabilities. Capitalizing on the

modular movement requires an executive team

and board with more diverse experiences, skills

and backgrounds than what’s currently found

at most homebuilding companies.

6 http://ternercenter.berkeley.edu/uploads/offsite_con-struction.pdf

7 https://www.geospatialworld.net/blogs/bim-adoption-around-the-world/

• New Verticals & Skills: Homebuilders must recruit for experience outside

the traditional disciplines and skill sets.

Leaders must see and understand how

alternative housing options such as pre-

fab can drive sales and improve the

bottom line.

• Action Items: Seek out directors and executives who have led turnarounds

and business transformations within and

outside the homebuilding and construction

industries. Look for direct experience in

modular construction in a single-family,

multi-family or commercial setting. Recruit

leaders who know how to build new

markets and launch new product lines.

Disruptor 2: The Digitization of the Homebuilding Industry

Homebuilders are in the midst of a fourth

industrial revolution as companies digitize the

supply chain and realize the promise of the

industrial internet of things (IIoT). According

to a PwC report, “Industry 4.0 focuses on the

end-to-end digitization of all physical assets

and integration into digital ecosystems with

value chain partners.”8

Most retail and manufacturing companies

(70%) have already started digitizing logistics

supply chains.9 Yet the construction industry

8 https://www.pwc.com/gx/en/industries/industries-4.0/landing-page/industry-4.0-building-your-digital-enter-prise-april-2016.pdf

9 http://www.gtnexus.com/newsroom/press-release/new-study-70-executives-have-started-digital-sup-ply-chain-transformation

DISRUPTION IN THE HOMEBUILDING INDUSTRY

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is one of the least digitized in the U.S. Only

agriculture is less technologically inclined.10

One early area of disruption is the supply

chain. These digital disruptors, and many

others like them, are changing the way

homebuilders procure and sell supplies,

systems and assets:

• IronDirect: This entrant into the construction equipment e-marketplace

standardizes popular options and offers

fixed pricing, financing, maintenance and

even reselling via its online platform.

• Amazon: Recent survey data shows that 92% of wholesale distributors consider

Amazon a competitor. Though currently

selling primarily to individual consumers,

it’s only a matter of time before the

e-marketplace behemoth begins offering

raw building materials and building

supplies to the trade, making it faster

and easier to research, buy and reorder

supplies online.11

• Siemens Building Technologies: One of the global leaders in intelligent building

automation technologies, Siemens

sells hardware and software to power

smarter, safer and more energy-efficient

buildings. This market is expected to

approach $100 billion by 2024, according

Grand View Research.12

10 https://www.mckinsey.com/industries/high-tech/our-in-sights/digital-america-a-tale-of-the-haves-and-have-mores

11 https://www.supplychaindive.com/news/wholesale-dis-tributor-amazon-competition-technology/447372/

12 https://www.grandviewresearch.com/industry-analysis/intelligent-building-automation-technologies-market

Another digital disruption driver is the

internet of things (IoT), which enables objects

to send and receive data via the internet and

empowers companies to gather, monitor and

analyze more data than ever in real-time.

Connected devices impact the homebuilding

industry in three major ways:

1. Equipment Costs. The time and financial costs of equipment

monitoring, maintenance and repair

are reduced with continual status

reporting, automatic scheduled

maintenance and automated service

alerts. These smart machines know

when they need service sometimes

even before you do and produce

data to help you tweak performance

and optimize processes. These

capabilities reduce downtime and

unexpected repair expenses.

2. Forecasting & Inventory Management. Sensors make estimating and

sourcing inventory faster and easier.

You can forecast more accurately,

make sure you have the materials

and supplies you need when you

need them, and analyze data to

understand seasonal and other

trends.

3. Vendor Performance. The IoT enables homebuilders to easily collect and

analyze supplier and contractor data

such as on-time deliveries, quality

issues and returns or corrections.

An IBM study estimates that almost

two-thirds (65%) of your product and

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service value is related to the quality

of your suppliers.13

What Digitization Means for Board and Executive Recruitment

Undertaking a digital transformation requires

a leadership team and board with proven

capabilities in digital-first endeavors and

data management. Homebuilders must

recruit board members and executives with

expertise in these domains as well as less

risk-averse points of view.

• New Verticals & Skills: Using new supply chains and technological advancements

means adapting to a new way of working

and assuming some near-term risk.

Putting IoT data to good use mandates

a new emphasis on data collection,

analysis and security.

• Action Items: Pursue directors and executives who have overseen digital

transformations in similarly entrenched

13 https://www.ibm.com/blogs/watson-customer-engage-ment/2017/04/03/top-supply-chain-trends-2017/

verticals. Prioritize direct experience in

modern supply chains and marketplaces,

technological innovation, software and

building engineering, IoT, and digitized

manufacturing and construction. Identify

potential candidates with know-how in

data analysis and management as well

as cybersecurity. Recruit prospects with

a track record of responsible risk-taking

and direct experience operating in what

McKinsey calls “an opaque market.”14

Homebuilders who want to get ahead of

the competition must take advantage of

disruption and be willing to do business

differently, says John McManus of Hanley

Wood’s Residential Group in a recent essay

for BuilderOnline.com.

Rather than focusing on building new homes,

he writes, successful companies will train

their sights on “re-engineering their business

models, and taking proactive action on

removing costs and generating more value per

employee hour so that more people can be

priced-into the market than priced-out of it.”

14 https://www.mckinsey.com/industries/capital-proj-ects-and-infrastructure/our-insights/reinventing-construc-tion-through-a-productivity-revolution

Travis Kononen is a Managing Director at Ferguson Partners.

He specializes in the REIT, real estate private equity and

investment banking sectors, executing mandates in the US, UK,

and continental Europe. Mr. Kononen furthermore maintains

close links with INSEAD and the London Business Schools’ real

estate programs. Prior to opening the San Francisco office, he

spent six years in the firm’s London office, and three years in the

New York office.

Mr. Kononen has a degree from Oregon State University.Travis Kononen Manging Director

Ferguson Partners

+1 415-874-3160

tkononen@fergusonpartners.com

WILLIAM J. FERGUSON Chief Executive Officer

Ferguson Partners

+1 312-893-2339

wferguson@fergusonpartners.com

Mr. Ferguson serves as Chairman and Chief Executive Officer of Ferguson

Partners and as the Co-Chairman and Co-Chief Executive Officer of FPL

Advisory Group. Mr. Ferguson conducts senior management recruiting

assignments, with a specialization in president/chief executive officer

searches and recruiting assignments for Boards of Trustees/Directors.

He also facilitates public company Board assessments and senior

management assessments.

Before founding Ferguson Partners, Mr. Ferguson was a Managing

Director with one of the leading international executive recruiting

consultants. There, he co-managed the firm’s national real estate

practice. Prior to focusing on real estate, Mr. Ferguson worked for

General Mills, Inc. in Minneapolis in strategic marketing.

Mr. Ferguson holds a Bachelor’s degree from Harvard University,

where he was a member of Phi Beta Kappa, and an MBA in

marketing from the Wharton Graduate School of Business.

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© 2017 FPL Advisory Group. The Ferguson Partners recruitment practice consists of five affiliated entities serving FPL’s clients around the world: Ferguson Partners Ltd. headquartered in Chicago with other locations in New York and San Francisco, Ferguson Partners Canada Co. in Toronto, Ferguson Partners Europe Ltd. headquartered in London with a Japan branch located in Tokyo, Ferguson Partners Hong Kong Ltd. in Hong Kong, and Ferguson Partners Singapore Pte. Ltd. in Singapore. Ferguson Partners Europe Ltd. is registered in England and Wales, No. 4232444, Registered Office: 100 New Bridge Street, London, EC4V 6JA. Ferguson Partners Singapore Pte. Ltd. is registered in Singapore, Business Registration No. (UEN) 201215619H, Employment Agency License No. 12S6233. FPL Associates L.P., the entity which provides consulting services to FPL’s clients, is headquartered in Chicago.

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DISRUPTION IN THE HOMEBUILDING INDUSTRY

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