Business podcasts, audiobooks, articles and magazines like The Lean Startup and Team of Teams often stress the importance of building systems. But what does this mean?
According to Businessdictionary.com, a system, defined in the business sense, is “a methodical procedure or process that is used as a delivery mechanism for providing specific goods or services to customers.” To truly understand what a system is, we need to decompose it to its parts: procedures and processes.
The fundamental building block of a system is the procedure, sometimes referred to as a Standard Operating Procedure or SOP. A procedure is something created with a known set of steps, that when repeated, will produce a predictable result. Procedures are detailed, contain specific instructions on the completion of the task and are usually used at the front-line level. As the CEO of a real estate investment group, I am responsible for the integration of our business functions. This is made easier due to my military training as an officer, which stresses the importance of developing systems.
Once you have developed SOPs for your business, it’s necessary to connect them. Once connected, the SOPs form a process. It’s possible for a process to have only one SOP, however, most processes contain multiple SOPs that different teams can execute and bring together to procedure the final product. For example, in business plan development, there are multiple teams with their own SOPs. Architects have SOPs for developing building plans, Civil Engineers for site plans, Structural Engineers for structural plans — and so on. As a development company, it’s our job to link all of these procedures into a process. We have a very specific procedure for analyzing land, including identifying all attributes of the land and the surrounding area, which is the first of multiple procedures in our Project Evaluation Process.
Building a system is a blend of art and science. The science contains several attributes of both procedures and processes that must be present in order to achieve your desired results. Two key attributes of procedures and processes are that they are repeatable with a multitude of environmental variables and can be executed by anyone in your business line.
A procedure or process is considered repeatable when a team, working under normal conditions, can achieve the same results every time. This is a critical distinction that is often missed, especially when the procedure or process is developed after a successful endeavor. Teams tend to forget success quickly. To ensure the procedure or process is repeatable, I recommend a third-party work with the team to analyze the procedures or processes from a non-biased point of view. If you’re going to build the process in-house, then capture the steps in an SOP document created in MS Word, Visio, Excel or notepad.
The second key attribute of a procedure or process is for anyone in the business unit with acceptable training and education to be able to execute it. If a procedure or process is based on a single individual’s skill, competency or their personality, it will not survive. Eventually, that person will leave or get promoted. The phrase “lowest common denominator” is often used when describing how a procedure or process is developed. And at times this has merit. For example, unskilled labors should be able to develop project site security procedures and processes. That said, there is risk in simplifying a process so much that it doesn’t accomplish the result you’re striving for.
Once the science of building a procedure or process is taken care of, the hard part begins. Everyone has a different culture, mission, values, norms, etc. Account for these factors when developing procedures or processes. Overlay your mission, vision, values and culture to all procedures and processes before attempting to execute them to reduce the probability of failure due to external factors.
So you’ve developed procedures and processes and connected them to systems that are functioning within your company. Now what? Integrate those systems and leverage technology to automate wherever possible. If your systems live in isolation, you’re only halfway there. To truly leverage the power of systems, they must be integrated and additive to one another. Review any integrations that may be available. Most providers have a list of other systems that can integrate with their software.
With our systems, we can analyze hundreds of deals without spending time on the initial analysis. Of course, it’s not perfect. No IT system ever is. However, we’ve saved hundreds of hours by eliminating hundreds of deals that would never come close to meeting our criteria. We have integrated systems for analyzing deals, acquiring them (through automated letters of intent and purchase and sales contracts apps), raising capital (through automated Regulation D offering apps) and managing projects (through systems integration between Podio and Smartsheet) all by picking systems that integrate with each other.
By mastering the science and art of creating a process, we are able to do the work of a firm with ten times as many people. And because our processes and systems are executed the same way every time, supplemented with detailed checklists and automated, we don’t miss steps, which provides comfort and predictability for both our team and our investors.
Organizations operating in complex environments must employ a structured decision-making process that is repeatable at all levels of the organization. As real estate developers, we operate in pretty complex environments with multiple stakeholder groups.
As such, we use a demilitarized version of the army’s military decision-making process, or MDMP. We call our process the Strategic Decision Making Cascade™ (SDMC). There are four steps to the cascade, each one building upon the previous. We employed this process when we decided to make a strategic pivot out of residential development to commercial development. Using the Strategic Decision Making Cascade™, we analyzed a number of different asset classes and found the best one based on our required criteria. Since then, we’ve become more focused, more efficient, and have seen explosive revenue growth. The four steps below outline our process and provide your team with the structure necessary to make tough decisions in a strategic way.
The first step of the SDMC™ is to thoroughly analyze the assignment. In the military, this step is called “mission analysis.” At Spartan, we call it “assignment analysis.” We do this using the acronym GETT-TRC, which stands for: goal of the assignment, expected deliverables, tasks to be completed, time available, team, resources available and, finally, customer considerations.
Going through each of the variables above creates a uniform understanding of the assignment. During this part of the process, it is important to establish lists of facts, assumptions and constraints. Develop these lists for each of the GETT-TRC variables and constantly review them throughout the process. The assumptions are most important. Using assumptions in decision making adds risk, so it is important to note which assumptions are being used. Seasoned teams will work to eliminate as many assumptions as possible, changing them into facts or constraints by gathering additional information as necessary.
In addition to analyzing the assignment, establish five to seven evaluation criteria to be used in the last step of the process. Establish the criteria now, as through the process, no matter how diligent the team is in fighting groupthink, there will be a favorite course of action. Waiting until the final step to develop the evaluation criteria could cause those criteria to be skewed so the favorite is chosen.
Once the team has researched and reviewed each part of GETT-TRC, it’s time to move into developing possible courses of action (COAs) for accomplishing the assignment. Make sure the team does not have any preconceived notions of what “right” looks like. This will severely impact the team’s ability to objectively develop multiple courses of action and ultimately pick the correct one. This step has a high risk for groupthink to creep in. The designated leader in charge of the process must stop any aspect of groupthink or the entire process will be wasted.
I recommend developing three to four COAs that meet the screening criteria which are: feasible, acceptable, suitable, distinguishable and complete. “Distinguishable” is the criterion teams often get incorrect. Time and time again, I’ve seen teams develop one COA, then fall in love and go with the next two as variations of the first. For example, when you go to Taco Bell, there are no distinguishable courses of action for your meal. They’re all made of the same ingredients, just wrapped in a different shell.
With all courses of action having passed the screening criteria, the team is ready to analyze them. This is called “wargaming.” There are two concepts that make wargaming effective as well as a lot of fun. The first is “action — reaction — counteraction.” For this to work, split the team into two or more groups (I recommend basing them on key stakeholder groups) and walk through the COA with the “corporate” team executing an action, the “stakeholder” teams reacting to that action and ending with the corporate team executing a counteraction. Execute this cycle as many times as necessary until you reach an acceptable outcome. Make sure you document everything.
The second concept comes from the Israeli Mossad (their CIA) and is often referred to as the tenth man. The Israelis select one person to be as disagreeable but factual as possible with everything the team is suggesting. If the team can work through all the disagreements, you probably have a solid solution and have prevented groupthink.
Now having war-gamed the COAs, the survivors need to be compared and one ultimately needs to be selected. This is where a decision matrix comes in, which is basically a chart listing the COAs and the evaluation criteria. This step of the process requires upfront planning as to how the decision matrix will be created. The team needs to decide how the scoring will work, whether they want to weight the evaluation criteria and how to work through any scoring disagreements.
Once the team has decided on a scoring methodology, they need to develop the matrix and execute the comparison. To develop the matrix, have the team list the various COAs across the top and the evaluation criteria in a column to the left. Assign a value to each evaluation criteria for all COAs (usually 1-10). Select the COA with the largest value.
Using a structured decision-making process not only ensures the best decisions are made, it also saves a lot of time. Like anything else, teams will struggle with the process until they become familiar with it and individual roles are figured out. Once that happens, it’s amazing how fast complex decisions can be made without sacrificing accuracy or thoroughness.
Scott Lewis, CEO, and Ryan Gibson, CIO of Spartan Investment Group, LLC, a real estate development and syndication company have been accepted into the Young Entrepreneur Council (YEC), an invitation-only community for the world’s most successful entrepreneurs 40 and younger.
Scott and Ryan join other hand-selected YEC members, including the founders of high-growth companies like 2U, Threadless, Rent the Runway, ContextMedia, Red Mango and HootSuite, to become part of a curated network of successful peers and get access to a variety of exclusive benefits and resources, including personal brand building and publishing opportunities on top business outlets, curated networking and peer-to-peer support, volume discounts on business services, and invitation-only events and VIP experiences.
Members of YEC, called “one of America’s most successful communities for business professionals” by Entrepreneur, get access to the people, benefits and resources they need to continue growing their businesses – and a dedicated member concierge who acts as an extension of their own team, providing personalized one-on-one support. In addition to concierge-level support and exclusive benefits, they become part of a carefully curated network of North America’s most successful young business owners.
The risk return curve highlights the relationship between the return of an investment in real estate and its relative level of risk.
Risk is a measure of volatility, a margin of error. For example, you could have a 4% return + or – 1%, which is both low risk and low return. Or you could have a 25% return + or – 50%, which is both high return and high risk.
1) Core Assets: These assets are the McDonald’s stock of real estate, exhibiting slow, incremental gains with very low volatility in value. And REITs focusing on core assets are the S&P 500 Index of real estate. Core assets are stabilized assets in core markets. For example, a 100-unit apartment building in the heart of Denver, CO that is 90% occupied at market rents.
2) Core Plus Assets: These assets perform a lot like Core Assets, but there is a particular feature about them that makes them not as low risk. For example if we take the same exact facility described in Core Asset and airlift it to Forney, TX which is part of the Dallas, TX MSA, but is not in Dallas itself, it may be considered a Core Plus asset. Forney, TX is considered a riskier location than Dallas, TX.
3) Value Add Assets: These are assets where additional value can be created either as a result of increasing revenue on the existing business, decreasing expenses, updating amenities, aesthetics, or major systems, changing lease terms, or other creative mechanisms.
4) Opportunistic: These deals range from raw land to horizontal development, vertical construction to major expansions. In most cases, there is not a history of cash flows, and the developer is speculating that there will be value in the executed business plan. There are many more barriers to success, which is higher risk, but often times the reward far outweighs the measurable risk.
This is not a one-size fits all chart. You may see value add opportunities on 100-unit apartment buildings in the heart of Denver, CO. You may see development opportunities in midtown Manhattan where the city is guaranteeing cash flows on affordable housing. And there are also thousands of ways to mitigate risk, so that even if you are high up on the risk-return curve, the right investor can generate Opportunistic returns with Core Plus level risk. There’s also hundreds of ways to be operationally ignorant, so that a Core asset becomes dilapidated and a cheaper value-add asset for the next investor. And regardless, of the asset type, you can always make the mistake of overpaying or find a great, underpriced deal, which will affect the ultimate return to investors.
Self-directing your retirement account affords more control and decision making over your investments. Your standard proclaimed “self-directed” account administered by a traditional brokerage (such as Fidelity, Schwab, TRow Price, etc.) does not allow you to fully self-direct. While those brokerages tout selection of your investments, or offer a brokerage link, the type of investment is limited.
A truly self-directed account not only allows you to invest in non-traditional assets such as real estate, precious metals (gold and silver), but also traditional investments you may be more accustomed to such as stocks, bonds, and mutual funds. Some investors think their retirement is not available to purchase real estate other than through a Real Estate Investment Trust (REIT). This is simply not true.
A self-directed account can be established by rolling over your existing IRA or 401(k) with a custodian that administers self-directed retirement accounts. Many of Spartan Investment Group, LLC’s clients use a company based in Bellevue, Washington called Wealth Flex. The administrator rolls over your 401(k), IRA or eligible retirement account into your control by establishing a checking account in your Retirement Trust’s name. Think of it like you are switching from Morgan Stanley to Charles Schwab, but instead of being limited to the funds those brokerages offer, you now have less restrictions over your investment decisions.
There are several options offered by self-directed administrators for structuring your Self-Directed retirement account. You can setup a “checkbook IRA”, an “LLC” or a “Trust” to name a few. An LLC structure can be costly and difficult to maintain; however, speak with your financial advisor and CPA for the structure that best meetings your specific needs. Interviewing several self-directed administrators may also assist in determining what’s best for you.
While a self-directed account provides large degrees of flexibility, it does come with responsibility and some restrictions. For example: You are walking the beach in Hawaii and see a rental property that would be amazing to put in your portfolio. You can buy it with your self-directed account, rent it out, and your retirement account will benefit from the earnings. However, if you personally benefit from it (you go there for your yearly vacation and stay in the property) it is a prohibited transaction. Also, you cannot rent the property to your “vertical” relatives (think up and down) children, parents, grandparents. Keep in mind prohibited transactions can result in severe tax penalties so check with your advisor/administrator before making a transaction.
Your 401(k), with your current employer most likely cannot be rolled into an IRA. This is due to most plan administrators’ rules. However, if you have left an employer, your 401(k) becomes eligible for “rolling out” into a self-directed plan by the US Department of Labor regulations. You can also convert an existing IRA into a self-directed account.
Several of our investors have used self-directed accounts to invest in a self-storage project. One client had a 401(k) from a former employer that was eligible to roll-over to a self-directed account. The client started the roll-over process and eventually used a portion of the account to invest directly in the self-storage project. The opportunity allows the investor to see the project evolve first hand, bolster a strong return, continue to build retirement funds, and control which operator they invested with.
As we stand at the edge of our properties and look inward, we can see the rows of roll doors. The two stories of glass elegantly showing off 5’ x 5’ doors inside, and the steady stream of customers begging to store their belongings with us.
Our feasibility study provider concluded this is an amazing site and we should build the absolute maximum amount of storage possible and not leave one stone unturned. We envision every square foot of dirt brilliantly developed to maximize net operating income with efficient operations and zero wasted space.
However, as developers, dreaming is not our job. Within proximity of our property, we must assess the built environment and correctly determine what is going to be economically viable three to four years hence. All this given imperfect information, dynamic economic and financial environments, and changing population demographics.
This is no small task and not for the faint at heart. Our biggest risk in development is to build something no one wants. A building not economically viable when the certificate of occupancy is granted.
There are two primary ways to mitigate this risk. First, choose the correct variables to assess the built environment as it stands today. Ascertain their rates of change, and then use those rates of change to develop a future state projection of the built environment of tomorrow.
While experts argue how to conduct a scan of the environment, Spartan Investment Group, LLC takes a page out of the standard strategic planning playbook by using the PESTLE acronym for initial assessments. PESTLE stands for Political, Economic, Social, Technological, Legal, and Environmental.
Political, the smart developer engages local residents and leaders to determine the appetite for a self-storage facility. While we love them, they are not always the preferred type of development. No matter what the other variables tell you, if the residents and local politicians are going to fight you every step of the way, it may not be worth the fight.
Economic looks at positive economic indicators such as median income, competitive rates, property taxes, operating costs, job growth, etc.
Social Variable analyzes population growth, demand for storage, leisure activities, etc.
Technological examines the coming environment that will enable operating efficiencies.
Legal dives into laws and regulations of the local jurisdiction to ensure a self-storage facility is allowed.
Environmental provides insight into the types of environment factors in play. For example, wetlands, storm water mitigation, civil infrastructure demands, etc.
After the PESTLE assessment is complete, a second way to mitigate development risk is to look at multiple courses of action (COAs) for each facility under development. Some call these exit plans, we don’t. We look at COAs to adjust the development to meet unforeseen changes in the operating environment.
When developing COAs, we use a page out of the military’s decision-making process. When military leaders are assessing various COAs to accomplish their missions, they use the following criteria summed up by the acronym FAS-DC. FAS – DC stands for feasible, acceptable, sustainable, distinguishable and complete.
Feasible – This is generally answered by the feasibility study; however, developers should consider that a feasible COA may not be the type of facility they started out with. For example, a law could change disallowing self-storage, causing the developer to add retail pads to attract local and national tenants. A tough situation, but one many developers have been in.
Acceptable looks at whether the development risks associated with a particular project are acceptable to include to investors.
Sustainable identifies what is required to sustain the project from financial and operational viewpoints and then compares them to what is available to the project. We’ve all seem the half built structures that started out with promise only to run out of one resource or another.
Distinguishable Many planners have a very hard time with creating distinguishable courses of action. The example often used in military school houses is going to McDonalds for lunch. Sure, there are burgers, chicken nuggets, and salads, but it is all fast food. Distinguishable lunch COAs would be McDonalds, bringing lunch from home, or going to a fancy restaurant.
Complete ensures the COA has been developed from the first day to the closing day.
Developing land carries risk and the corresponding reward. No developer can mitigate risk and there are pages of texts on mitigation strategies. You will mitigate a large number of risks by assessing the operating environment using a PESTLE analysis and developing multiple COAs that adhere to FAS-DC. If used on a consistent basis, these strategies will enable your team to make systemized, repeatable, and defendable decisions on all of your development projects.