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Power conductor
Housebuilder – November 2004

Centralised procurement and management structures offer cost efficiencies for large housebuilders - but devolving power to regional operations also has its advantages. Mark Smulian considers the issues

Every housebuilder who has ever sought planning permission will be familiar with the debate about centralisation versus devolution, and will probably have complained about the inconsistent decisions given by different local authorities.

But suppose the planning system was run from Whitehall. Would it have the flexibility to recognise that what might be a suitable and profitable development in one place would be a disaster somewhere else?

Debates about the degree to which power is centralised or devolved also apply to the way housebuilders run themselves. If a builder operates across most of the country, is it best to allow regions the autonomy to act on the demands of local markets, or should the centre keep a tight rein to prevent any wayward management decisions?

There are pressures both ways. The centralised company will know that there are no unpleasant surprises lurking and will be able to exploit economies of scale in its procurement.

But the decentralised one will be faster on its feet in responding to its market and can take opportunities without time consuming referrals to a head office.

Brian Green, editor of the annual Housing Market Intelligence report, says: "You can't say that either a centralised or decentralised model is better: it depends on the culture of the company and what its management wants to do.

"There does appear to be some shift of late towards more centralised management control and procurement. In most cases, though, centralisation will tend to be a matter of degree, rather than there being companies placed at either end of a spectrum or a common pattern of centralisation."

If there is a tendency to increased centralisation, what is causing it? Green sees three key drivers, one old and two relatively new. The old one is, "the city hates uncertainty, and so, at least in publicly-quoted companies, management teams may feel that they need to know what is happening at any given time and that may lead to a more centralised approach."

Another driver is the increasing emphasis on squeezing costs from the supply chain, since local purchasing from a multiplicity of suppliers means that different parts of the company may be buying similar commodities in fairly small amounts. These may be good deals individually, but they cannot drive the sort of bargains a national company could get from concentrating its buying power.

"If you reduce the number of suppliers you get a big advantage in terms of economies of scale because you have more clout to buy with, reduced administration, and you get a closer relationship with the suppliers that remain, so they understand your business better," says Green.

Bulk purchasing of this sort makes sense if the company is using the same materials across all or most of its output with standard house types. On one hand, a builder who makes a selling point of following local vernacular styles would gain little from this approach, since sourcing local materials adds value to their homes. On the other hand, the growing use of modern methods of construction, the economies of which depend on bulk purchasing of components, may in time drive increased centralisation of purchasing.

The third driver, according to Green, is that the growth in information technology can increase centralisation since it makes possible control systems that might have been cumbersome. If regions can report to the centre at the click of a mouse, and the centre can communicate likewise, those who want a more centralised model can point to the technical means being available to do things that would have been impossible.

Whatever the arguments for centralisation, they cut no ice with Bellway Homes, a company so devolved that it operates in 18 almost wholly autonomous regions. Indeed the company used to advertise itself as the "local national builder."

"We adopted the route of giving local managements control of the whole gamut of design, house types, planning and sales," says finance director Alistair Leitch. The only exception is land purchases, for which proposals must be approved by the Newcastle-upon-Tyne head office to maintain control over capital spending.

"We have got a flat management structure with 18 divisions which all report to the board," he adds. "There are various set criteria they must meet, such as return on capital employed. But how they do it is very much up to them. Apart from buying sites they do everything, because they know what prices are in the local market."

Bellway does not have national house types, and the company sees this as a strength, since it has to build according to different design guides and local tastes.

Bellway's operational divisions are expected to exchange good ideas and assist each other, but there is no formal structure to this. Leitch explains: "If the east midlands, say, has a problem, they should pick up the phone to the west midlands, or wherever. Likewise, if someone sends in an example of best practice to head office that we think is really good, we will send that out with a recommendation."

Bellway has national purchasing deals, but the divisions can opt out, which means the company may not always mobilise its full purchasing power. Leitch admits: "There have been regular debates about economies of scale in procurement, but we do not think that our method leaves us missing out too much. Local managements can get good deals as they have each got quite big buying power."

Bellway's structure does not leave its head office, which boasts a mere 30 staff, disengaged. "Directors visit the divisions on a regular basis on site and meet managements on a bi-monthly basis, so we can all be out there two or three days a week," he says.

Westbury Homes operates through nine regional offices and has its 100-strong head office at Cheltenham. Unlike Bellway, it works with standard house types and centralised strategic procurement and decisions on land buying are taken at Cheltenham. But the identification of potential land purchases, along with planning, site management and selling functions are all handled locally.

"Westbury has been more decentralised in the past and the reason we are not so now is that you do not want to be continually reinventing the wheel," says Nigel Fee, who is this month stepping into position as the firm's new chief executive. "We are centralised for some functions but localised for others and aim for the best of both worlds."

Fee says this approach offers efficiency benefits and head office decisions on design and procurement are final once taken. He explains: "There are nine regions and if they all decided to redesign a standard house type at the same time it would waste resources.

"Bulk purchasing is another big issue. We have to make the best use of our buying power and there is no sense in buying 400 bathrooms from someone when we could buy 4,000 and get a better deal out of it."

Westbury's regions have their annual budgets approved by head office, and within this they are free to decide what to advertise where and to set prices in line with local markets. A central team ensures that good practice is spread around the company.

regions

"Regions will let us know of ideas and we may say 'this is working really well, we should all be doing it,'" says Fee.

Taylor Woodrow's approach to the centralisation v decentralisation question sits somewhere between Bellway's and Westbury's. Prior to its acquisition of Wilson Connolly, the firm had ten regions, each of which built some 1,000 homes a year. Following the acquisition two years ago, it added an eleventh, in Anglia, where it had not previously had a presence.

"We look to get the best of both worlds," says Ian Morris, director of corporate communications. The regions have a fair degree of autonomy, he says. They control pricing and, unlike the other companies, can - within limits - buy land on their own authority. Taylor Woodrow also has national purchasing deals and house types, but both include some flexibility.

"We try to have a central supply chain working to national agreements and we will use that where it offers savings, but if there is some situation in which it is not appropriate to use a national supplier then there is autonomy," Morris explains. "It is more a matter of following processes and criteria in procurement."

The company has core house types but "with a degree of flexibility to meet local planning requirements."

When it comes to considering the benefits of centralising your operations, or indeed devolving greater control to regional operations, there are arguments both ways. Different degrees of centralisation will suit differing companies.

"Centralisation can clearly help to squeeze out costs," Green points out. "But the question is, what, if any, are the downside costs a housebuilder may face as a result?

"One of the big dangers with an overly centralised system is that it loses touch with it markets and dampens the entrepreneurial spirit of its people."