Revolutionizing Multifamily Construction: How Norhart Achieved 20-30% Cost Reductions And Transformed The Industry With Mike Kaeding | Ep. 243

My guest is Mike Kaeding, the CEO of Norhart. Norhart is revolutionizing the multifamily market with the way that they deliver their construction projects. We are going to talk all about that here on the show. I’m going to give you one quick hook for you to think about. Mike is so committed to getting the right people in the right positions in his organization that he went out and hired sixteen in-house recruiters.

If there’s one takeaway from this interview that you can run with, it is that idea of hiring an in-house recruiter in your organization. Forget the outsourced recruiters. Get someone in your company who knows your culture and who’s committed to bringing the right people in and putting them in the right positions. That’s just one of the topics that we cover in our conversation.

There are many other things that we talk about because he is committed to driving down costs to 20% to 30% with the ultimate goal of driving down costs to 50% from where they are currently in the construction industry. We talk all about how he is doing that in very practical and straightforward ways. Enjoy my conversation with Mike and share it with other people. Thank you for reading.

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Mike, welcome to the show.

Thanks for having me.

My pleasure. Please give the readers a quick background on yourself.

At a high level, I run a company called Norhart. We design, build, and rent apartments, but we’re focused on driving down the cost of constructing housing. We’re already achieving about a 20% to 30% reduction in costs. We believe we can achieve a 50% overall reduction, but imagine what that means someday. Someday, people’s rent or mortgage payments could be half, and that’s what we’re working and trying to achieve.

Those kinds of numbers to me are a little staggering. If you let off with 3%, 4%, or 5% but you’re saying you were driving towards a 50% reduction in costs, let’s back off a little bit. Why are construction costs so high?

If you look at a bunch of industries like manufacturing, for example, over the past years, they’ve improved labor productivity by 760%. During that same time period, the world of construction has done virtually nothing. They’ve improved by 10%. If you take the lessons learned from these other industries, you can see radical improvement. I think a lot of the reason why construction hasn’t seen that improvement is it tends to be an industry that’s stuck in its ways. “My granddad did it this way. My dad did it this way. I’m going to do it this way as well.” If you create the right culture, find the right people, and inspire change, you can start to see improvement in your space as well.

It’s interesting because it’s not unfamiliar for me to hear people talk in this way. The first thing that always pops into my head is, “I want to improve my productivity, efficiency, and drive down costs, but you don’t understand. Every project is unique. I’m not building. I’m not in a factory every single day. I’m out on the job site. I’m dealing with multiple trades. I’m dealing with supply chain issues. There’s so much out of my control that drives up my costs.” When someone begins to respond to what you are saying in that way, Mike, what’s your response to that?

A lot of the techniques that other industries have used can be used regardless of our situation. It’s by controlling the things that you do control. One of the simple things is to think about each day, “How can I make my job a little tiny bit better? How can I find two seconds of wasted time in my day?” When you start to look at the things that you control, you can start to find, “I can make little incremental improvements.”

To save massive amounts on cost is not some silver bullet. It’s solving 10,000 little problems. The first step is to have the mindset and the willpower to be willing to look at what you’re doing and make those small incremental changes. As you said, there are things that are out of your control and it was the same for us. What we started doing is we said, “Enough is enough. We don’t want this out of our control. We want to solve it.” We started bringing all the different aspects of construction underneath our umbrella.

Let’s dive into that a little bit because it’s interesting. A couple of minutes ago, you talked about the importance of culture and people. It’s almost as if to get ahead of ourselves and say, “Here’s a particular process. I’m going to try and fix that process, but I don’t have a culture and the right people in place. I may fix a process, but then that process is going to get broken again.” Tell us a little bit about that culture and people piece.

This is the number one most important lesson I have ever learned. It changed the game for us. In fact, we were growing it by maybe 10% a year to doubling in size every single year as a result of this one change, and that is to hire the very best people. When I say the best, I truly mean the best. We go quite extreme. We will fly people in now from other states, have them work during the weekend, and fly them home on the weekend.

In 2007, Steve Jobs announced the iPhone. He walked off stage, and our staff member walked onto that same stage following Steve Jobs’ announcement. We now have engineers and architects in-house as well. We probably have some of the world’s best engineers and architects for what we are doing. The magic there is the best people start to change things. They unlock doors for you and make things possible that you didn’t even know were possible.

A lot of times, the thing I get back at this point is, “Mike, it sounds expensive. How in the world does that save money?” If you look at it on a cost-per-person basis, it’s expensive, but what most people fail to understand is that the best people are 2 to 5 to 10 times better or more productive than the average people. When you hire the best and look at it on a cost per unit produced, they’re less expensive. For those who feel they can’t afford to hire the best, I say you can’t afford not to, and it will change your world.

For those who feel they can't afford to hire the best, you actually can't afford not to hire them. And it will change your world. Click To Tweet

Let’s explore that a little bit. At what point in your career did you reach that conclusion? Again, some contractors are like, “There’s a labor shortage. There’s a shortage of talent. The competition is intense, so I’m going to bring in a B-player. I’ll try and suffer through them. Maybe a few C-players and if I get an A, then that’s great.” What difficulties and challenges did you have to get to where you sat down one day and said, “I am only going to hire the best whatever it takes.”

We were working on one of the projects. In fact, the building I’m sitting in now, we were struggling with it. We didn’t have great hiring practices back then. We used a lot of temp labor. We couldn’t seem to find anyone. We were like everyone else. There was a lot of strife in the workforce. They weren’t really into it. They were quick to leave if they found a job. It was a mess of a construction site.

I sat down and a mentor sat beside me and said, “Mike, you’re thinking about this all wrong. You’re trying to save money on employees, but that’s the wrong perspective.” There’s a book I read at that time called No Rules Rules by Reed Hastings that changed my world, and it hit home that I needed to change my perspective on how I looked at this. I need to start building the right kind of culture and finding the right people, and changing our hiring practices entirely. That’s the moment that it started changing for us. We evaluated our entire staff and we let 60% of them go. We rebuilt from the ground up, and it changed everything.

You let 60% of the people go, and one of the issues that I come across many times talking to someone in your position is, “I do want to let that guy go, but I have a contract. I have a schedule. I’ve got to get something built. I need a warm body.” How did you balance that flip in your thinking where you’re committed to getting only the best people and balance that with the contractual obligations you had currently in place and building the work that you had to build?

First and foremost, you have to change your mindset. We now actively talk about that very mindset. If somebody has that, “I got a deadline. I got something I have to get done,” we go back to a whole barrage now of examples of times that we took the harder path. Maybe we’d work longer hours or everyone was stretched thin for a little while, but we let the wrong person go.

We brought on the right person over time, and it totally changed the game for us. I think mindset is number one but then two is how do you do that? The labor market is tough. It’s hard to find the best people. How can you find them? We were in the same boat. At this point, we’re probably about a 100-person company. What we did was we ended up hiring sixteen recruiters on staff.

We said, “We’ve got to solve this. Let’s bring a whole team of people that all they do is recruit.” We don’t just post and pray. You don’t post on Indeed and hope you get good candidates. It is much more elaborate than that. Our team is going out and looking for the best. They start building out databases of all the other construction companies and who the best players are in each of those other companies. They start to build relationships over time so that when we do have open positions, we can pull those people in. It’s a different mindset and perspective. You’re investing and there’s a cost to it, but it pays off in the end.

Let’s explore that because that’s a unique take. Again, one of the complaints that I hear from many of my clients is recruiters suck. It sounds like you went after the recruiter’s suck by bringing in your own recruiters. You talked earlier about the hiring practices that you guys shifted as a result of the change in your mindset. Please go into a little more detail on how your hiring practices have evolved and changed over the years.

I completely agree. Don’t use third-party recruiters. They don’t bring anyone good. I honestly think they just post and pray. Once they get someone that comes in, they pass them onto you and get a commission off. It’s terrible. We realize that if we’re going to do this right, we need our own team that understands what we’re trying to accomplish and that we truly want the best. We brought that team in. They do the outreach. The process they would go through to select people, for 10,000 applicants, we will bring on maybe 100. They go through multiple rounds of interviews, and a big part of it is our values-based interview. We have codified. We define what our values are.

We hire, we fire, and we evaluate people based on those values. People know what they are. One distinguishing value is being a genuine human. We want respectful people that say hi to you in the morning. Is that too much to ask in the world of construction? It’s not this egotistical beat on my chest yelling at each other, which is, unfortunately, fairly common. That’s not at all what we’ve had and we’ve defined that. We’ve made that part of our hiring process. That is the interview process.

Can I ask you a question about the interview process? Many companies do what you’re describing. They clearly define their values and they say, “We want to hire people who align with our values.” In the interview process, they either miss or fudge. I’m hiring someone and I have five values. They hit three of them. Two of them are squishy on but I need their technical skills so they come. Six months later, “Why did I ever do that?” How do you guys discipline yourself 1) To be able to identify that this person is in alignment with your values and then 2) To not allow people who are nonaligned to come on board?

There are a couple of things. First, to identify it, we use probably the best technique that I know of, which I still think is imperfect. It’s a behavioral-based interview style. “Tell me about a time when you faced X or when you’ve dealt with X.” They’re giving you real tangible examples. Until you’ve done that a bunch, you don’t understand the spectrum. However, once you’ve done a bunch of those kinds of interviews, you start to see what a great, honest, deep answer is and what is a BS answer that someone is trying to fake you with. I think that helps.

Before I get to the more important step, there’s one other step too, which is the recruiters. We spent five weeks in training with our recruiters. They didn’t do any recruiting. They did five weeks of training. A big part of that was the values and making sure they understood that we never want to hire someone no matter how desperately we need them, no matter how much we love their technical skills. Never pass them on unless they align with our values.

That’s part of it, too, but if the recruiter sends them out, there’s another test. That is, for most of the positions, not everyone, but most of them are on a two-week trial period. We’ll pay them for two weeks when they’re out here, and at the end of the two weeks, their coworkers make the decision if they’re hired or not on that team.

They go through each one of the values and evaluate them and say, “Are they a ‘Hell, yeah,’ in every single value?” If they can’t honestly say that, then they reject them. We even reject about 60% of people at that stage. The recruiters are always very interested in that because they’re trying to say, “Did I do a good enough job that I sent to a candidate that you passed through?” They know they can’t skimp.

There are so many questions I want to ask you about that. This two-week process makes sense. How many candidates that are in alignment with your values do you lose because they’re like, “I’m not coming out for two weeks regardless of whether or not you pay me. I’m not going to do that.” Do you lose people because of that?

No. The reason we don’t is that if we’re a threat of losing someone because of that, we will change it for them. They’ll get special rounds of interviews and no trial period or a two-day trial period because it can take two days off from the current job. We’ll be flexible to work with the candidate, but I’d say 80% of people are okay with it.

There is some flexibility there. Let me go back to this. You said you hired sixteen recruiters. I have a couple of questions. Why did you hire sixteen and where did you find them?

Why sixteen? We were looking at our growth at that time and what we wanted to hit as far as the number of people we needed to hire and how many main hours we were projecting it would take for each one of those hires. We backed out this number and sixteen is the result. Actually, it was originally eight. That wasn’t going fast enough so we doubled it. Where do we find them? It is hard to find recruiters in the United States.

We spent 3 or 4 months. We’ve found some people, but again, no one was right at the level we needed to be. How do we solve that problem? We opened it up internationally. We have recruiters all over the world now that work with us. This was the start of our opening a number of positions up internationally. Once you go internationally, your caliber of applicants is high. You’ve got people that are looking for jobs. It’s an amazing pool. Usually, the cost is a little bit less as well. Not always, but sometimes.

When you say internationally, what countries? Give me a smattering of the countries that you’re recruiting from for your recruiters.

Mexico, Argentina, and Germany. It’s mostly South America or the South of the United States and some in Europe.

Why South America?

It’s because that’s where we could find it. We opened it up to a variety of countries and we started learning what was working and what wasn’t. Some of the countries, I believe, are native English-speaking. 1 or 2 of them are that way so that was helpful.

The reason I’m asking a lot of questions here is because there may be someone reading this and they’re thinking, “I’m going to go down this path.” Did you hire people who had construction experience, or was that an extra bonus if they had it? Are you willing to train people to recruit in construction?

We were willing to train. Part of that five-week training was going through construction sites and like, “Here’s what an electrical outlet is. Here are the skills-based questions for an HVAC guy. Let’s talk about this so that you have a good understanding of what you’re talking about.”

In terms of recruiters in a construction company, you’ve got to bid work, build work, and then get paid. Were you mainly focusing on the building work? Were you mainly focusing on getting labor and skill trades in, or were you focusing on project managers, estimators, business development people, and all that kind of stuff as well?

They recruit literally everything. It’s the whole gamut of stuff, even challenging positions like precast erection foreman.

Let’s back it up a little bit because we began the conversation by reducing costs from 20% to 30%. We went into this idea of culture and how that relates to the reduction of costs. It’s because if you have the right people in the right position who are in alignment with your values, then they’re going to be performing at such a level that will have an immediate impact on reducing costs. Am I summarizing that well?

Absolutely.

I’d like to go to the idea of the whole construction process. When you began this journey, where were you in terms of how much work you were self-performing, how much offsite manufacturing you were doing, and all that kind of stuff? Can you break that down for us here a little bit?

When it started, we did no offsite construction. I would say we probably self-performed framing and a little bit of electrical, but the vast majority of everything else was done by third-party companies.

Tell us the process you went through to go from where you were then to where you are now in terms of the construction process itself.

It was an iterative process. One of the steps along that journey is that our plumbing contractor at that time reached out to us and said, “Mike, unfortunately, we are now going to charge three times what we have always charged you in the past.” They were right in doing it. The market had gone up quite a bit, but I couldn’t afford to pay it. What do we do instead? We bought a bunch of plumbing books and started studying on the weekends.

We ended up hiring a licensed plumber and a bunch of apprentices. We started doing it ourselves. Honestly, we were terrible that first year. We probably didn’t save any money from it, but as you get into it, you start learning. Once we realize we can do plumbing on our own now and we’re doing it at a lower price point, it’s a better quality because the team cares. We’re in line with the rest of our systems.

We then started bringing on more and more things. Another stepping stone was when we went into precast concrete or the wall panel factory. Again, we were solving problems. Our precast concrete company wasn’t able to deliver precast concrete on the day and times we needed to make the entire system work well. There are only a couple of these companies in our entire state and we decided to become one of them, which was scary and terrifying. There’s a lot to it, but we jumped in and now we’re in a better place for it.

Tell us what state you’re in so people have an idea.

I’m in Minnesota.

As you’re talking through all of this, the first thing that pops into my mind is, “Mike, this sounds awesome,” but there’s money, time, and pain. Typically, the more money I spend and the more time it takes, the more pain I feel. As you were going through this process, how did you, as the leader of your company and your executive team, manage that dynamic of, “We’re spending money, it’s taking time, and we’re in pain?”

It’s hard because it is a tremendous amount of pain, but this is where you can go back to hiring the best people. When you have an incredible team, there’s an excitement level. We want to try new things. We want to experiment. If we get into a nice fluid and comfortable place, we get a little bit bored and want to try and push even further. Having the right people is a key aspect of getting through that but it’s painful. There are a lot of tough and hard moments. You’re not always successful. You’re learning. You got lots of skin bruises and stuff like that, but I think it’s worth it in the end because we’re seeing the results. We’re seeing meaningful cost reduction.

As the leader of the company, how do you manage the pain part? I’m talking about personally because your company is ultimately a reflection of who you are.

One of the first things is to let go of your ego. You’re right. The company is a reflection of me, but at the end of the day, I want to make a meaningful, positive impact in the world. That’s why I am here. I honestly can care less about money. Money’s a tool to help us get there but what I want to do is I want to solve a pain point. I want to make the world better.

For us, it’s solving housing affordability. When that’s all you’re focused on, you don’t care about your lifestyle. I don’t care about my ego. If you’re focused on making that kind of impact, then that pain is a little bit less because we do employee survey results, and one of the things I do is share all my results openly.

In fact, we post our results as a company on the website. We can see all of our employee feedback openly and honestly. The reason we do that is I don’t want to be fake good. I don’t want to protect some kind of ego. Instead, I want to be good. That means being honest about our weaknesses. When you’re at that level of honesty and openness, the magic behind it is it’s freeing. You’re no longer feeling pain because you’re stinking it up at something. Everyone knows you’re okay with it. We’re all working together to solve it.

Give us a little bit about how you developed to this point. Has this always been the way that you thought about business or was this something that you had to come to as a result of getting 2×4 a few times? How did that process happen?

For me, I knew I always wanted to make a meaningful impact. That was always built into my soul but it has evolved over time in the sense of understanding that, for us, it could be about housing affordability. I never had a big ego or anything like that so I haven’t had to be hit in the stomach with a 2×4. There are other things like my last survey results. Some of the feedback I got is that the team wants to interact or feel more connected to me. That’s been a lesson that I’ve had to learn. I’m learning to get out and spend more time with the crew. Connect with people and walk the site more often. There are lessons like that that I get on a regular basis and feedback from people, and then I work to apply it.

In terms of the types of projects that you build, you’re mainly doing multifamily in your company. Is that correct?

Yes.

Are you the owner as well as the contractor?

We are, yes.

How critical is that being the owner and the contractor? In your opinion, being able to drive down the cost as you’re describing, how critical is that portion of it?

Of the 20% to 30% savings that we’ve gotten, probably 5% of it might be related to being the owner. As I said, it’s a lot of things coming together. The value of being the owner is a couple of pieces. The first is you can schedule your workflow incredibly smoothly. I never worried about hiring a bunch of guys and pulling them back. I’ve got a very consistent flow right now. Every five hours, we complete another apartment unit. I can do that because I’m an owner or if you had a close relationship with an owner.

Another thing that’s a big benefit to being an owner is then we get to design the buildings. We now have our own engineering team. They do dissertations and very thoughtful analyses of what we do. We do cold forms steel right now. The way the steel is rolled, shaped, the exact widths, and flanges, they’ve got the perfect trust piece they built out as part of a floor system. Because of that, we can start doing some efficiencies in our engineering as well, which would be hard to do if you’re always doing a brand-new building.

As you’re describing now, you’re doing manufacturing and construction and you’re the owner. Most of the stuff you’re doing is in-house. What are some of the biggest mistakes you’ve made?

One of the big mistakes early on, we were working to get approval through the city council and there was an issue with the city council that they were legally wrong but morally right. I fought with them on it and said, “No, I’m legally right in this. You shouldn’t be charging me these fees or what have you.” Through that fight, I lost all the goodwill that I had with that city and that became incredibly challenging.

The lesson I learned in that case is it almost doesn’t matter what the contracts say or the law says. At the end of the day, do the right thing by the people around you, and that goes so much further than trying to nitpick and get all the contract stuff. That was one lesson that I learned personally. Although contracts are important and you should have them in place, doing the right thing by people matters a lot more.

You were talking about a 20% to 30% reduction in costs. Your goal sounds like it’s a 50% reduction in costs. What are you going to do to get there? What’s your plan for that?

Again, there’s a lot of stuff. One example of one of the newer things we’re working on is the supply chain. We want the right material for the right unit or even bedroom at the right minute. That is tricky. We’ve got a whole supply chain we’re building out for that, everything from sourcing directly from China to how it even gets redistributed on-site and kitted into the right spot it needs to go.

We’re expanding our manufacturing capabilities. We’re looking at things like cabinets and building more and more of the buildings off-site. I don’t know if full volumetric is truly the answer because there are added costs in that but it’s something between the kitted parts and full volumetric is what we will end up working through. We’re working on manufacturing facilities outside the United States right now.

We’re looking at putting a plant in Mexico that not only helps with labor costs but it also helps with tariff-related issues. It’s because there are some large anti-dumping and countervailing taxes that get put in place for certain imports. That’s a flavor of it. It’s identifying the next set of problems or working to solve them. Once we do that, it uncovers another set of problems and we work to solve those.

I know that your parents started the family business. What is your long-term goal from 20 to 30 years from now?

Over the next few years, we’re hoping to reach 192,000 units under management with a 60,000 unit-per-year pace. At that level, here within the United States, we’re starting to have a meaningful impact on supply. If you look at our rents and stuff online, you’d be like, “Mike, you talk about affordable housing and the price you’re charging is the same as everyone else,” and that’s true. The reason for that is if we lowered our price now, we’d solve housing affordability for a few thousand people.

Instead, what we’re doing is we’re taking those profits and pouring them into the system that builds housing. Elon Musk talks about how it’s hard to produce a car, but it is 10 to 100 to 1,000 times harder to produce the system that builds cars. I would venture to say, and some might disagree with me, that in the world of construction, we’re building buildings. We’re not building the system that builds those buildings, and that’s what we’re trying to do. As we reach that point over the next few years, we’re hoping to provide enough supply to the market that prices start coming down naturally not only for our own residents but for everyone nationwide.

What geographies are you guys building at the moment?

We’re in Minnesota, although we have manufacturing in Wisconsin as well. We’re expanding into Texas and we’ll probably be moving to the Southeast. The Sunbelt is what we’re targeting next.

Are there certain geographies that you won’t go into because it doesn’t make sense economically either from a regulation perspective or reach perspective?

New York City is one we’re probably going to avoid because it’s so different. Even in LA, that’s such a landlocked area. It’s new challenges we have to think about how to solve that I don’t have good answers for now.

This is where a lot of people will say, “Every project is different because the dirt is different.” As you’re looking at a piece of land to purchase, are there particular parameters for accessibility for the nature of the land itself that you have in mind that help you to filter through whether or not you should get that particular piece of property?

We think a lot about the resident experience after it’s built. What are the amenities around that? What is the school district like? Is it a nice neighborhood, or does it feel run down? If it’s positive in those regards, then we’re more interested in it. Another thing we look for is we’re trying to target 300 to 500-unit buildings. We want sites large enough to support that kind of building size. Those are the main factors.

As the CEO of Norhart, where do you spend the vast majority of your time at the moment?

A big chunk of my time is on culture-related things. I run every orientation. I do follow-up orientations. I do the surveys. I work hard to build that right culture because if I get that right, everything else falls in place. If I get that wrong, we fail. That’s one big area. Another big area is on specific initiatives to drive down costs I’ll get involved with. Right now, we’re working very much on getting a tight timeline, how when we deliver materials and when people are doing their work. We are optimizing that.

I’m always working on something new as well. The new thing for me right now is we recognize that capital and dollars are important in a business. However, what a lot of people fail to understand is another currency that’s also important, and that is attention. If you look at someone like Gordon Ramsey, a world-famous chef in Las Vegas, he’s got a few different restaurants and all of his restaurants have lines out the door.

Dollars are important in a business, but what a lot of people fail to understand is there's another sort of currency that's also really important – attention. Click To Tweet

You can hardly get into places like Hell’s Kitchen, but right across the aisle in the same casino, same location, and same great kinds of food, other restaurants are never very full. What’s the difference? The difference is he has that know, like, and trust people. We’re working to build that same know, like, and trust with people in our markets because it’s so powerful to help your business succeed.

Who are your customers, then? Who do you view as your customers?

The end customer is the resident. It is our customer. It’s most of America in the areas that we’re at or whoever is a renter in your neighborhood. The other kinds of people that we interact with and know, like, and trust are valuable are investors. We target retail investors for that as well.

How much effort and energy do you put into developing relationships with the municipalities and governing agencies that you have to interact with when you’re building your properties?

It’s a fair amount. We have a whole team dedicated to that now. I learned through that experience in one of the early city council meetings that it is critical. You got to have those relationships. After that experience, I would join networking groups. There was a mayor’s association that I could join. I paid for the membership and joined that and interacted with all the mayors. In one of the cities that has projects we have, I joined one of his groups to build more relationships. The more authentic and real those relationships are, it’s so much easier to get approvals where you need them.

How did you go through the process as the CEO of your company of taking on investment? Again, some people reading this are like, “Mike sounds great. Obviously, there are money constraints. You’ve got to get money to be able to do this kind of stuff. I don’t want to take on investors. I want to maintain complete control.” How did you go through that process yourself?

Even for us, we haven’t taken on investors, and the reason for that is because our costs are so low. We could build buildings for less than the loan of the project. Think about that. It’s crazy. We’d generate money with each building we have done. Now that’s changed in the last six months because of the rise of interest rates, which is why we started bringing on investors.

What we ended up doing is we created a new investment vehicle and a new company called Norhart Invest that acts like a bank. It’s not a bank. It’s not FDIC insured, but people can put money into accounts in that Norhart Invest, and they can lock their money between 6 and 24 months, and then we’ll return the cash to them. We looked at creating a bank and it turns out there were some reasons we didn’t, but we essentially created somewhat like a bank.

What’s nice about that is our investors, they don’t have control. They don’t direct anything, and they know exactly what their interest rate is going to be. It’s good, but it’s not infinite. Because of that, it’s given us the autonomy that we need to run effectively as a business but also gives us access to the capital that we need to continue to grow.

As you’re focused on culture, you’re doing the orientations. Do you ever invest your time when the company is going to be too large for you to do these kinds of things, or is that something you’re committed to and you’re going to continue to do it? 

That’s a great question, and I don’t know if I can answer it now. I know that I will fight tooth and nail to continue doing it as much as I can. Maybe what it looks like in the future is more of a live event or we’re in a larger auditorium space for orientation. I think it’s so important to build a connection with people. It’s hard to do that unless you’re willing to show up.

I’m going back to the recruiting and the hiring part. You have the two-week process for most people where the team at the end has to be able to say, “These guys or gal meet our culture and our values.” After that two-week period, is there another check-in point after that? Are you doing anything at 90 days or anything like that? How does that work?

We have a review process, but maybe the more interesting thing is something we stole from Netflix. It’s called the Keeper Test. Managers ask the following question of their staff on a regular basis, and that is, “If this particular employee were to quit, how hard would I fight to keep them?” If the answer is, “I wouldn’t fight tooth and nail to keep them,” then why are they there?

Most companies know they want the great ones. Most companies know they want the bad ones, but what we’re different from most companies is that most companies are okay with the average. We’re just not. We’re very open with people and upfront with that at orientation. We’re very supportive people on the way out, but we actively let people go that are no longer meeting that bar.

It’s interesting because I’d like to make a note of three names that you’ve mentioned so far in our discussion. You mentioned Reed Hastings, Elon, and Netflix. All of these are not construction companies. Reed Hastings is a tech investor if I remember rightly. What do you do consciously to fill your thinking and your perspectives with non-construction perspectives? How do you filter out what works, what doesn’t work, and those kinds of things?

We look for who’s doing something best in the world. When it comes to culture, I’m telling you right now, it’s not the world of construction. Even the best construction companies, I would still say are weak compared to the rest of the world. We started looking at places like Google and Netflix. We started asking, “What are they doing differently?” We studied them incessantly and applied what they learned to our industry, even down to all of our benefits. For example, all of our team members, including our low-level construction workers, get unlimited paid time off. It’s crazy. They can get paid time off as much as they want whenever they want it, but when you look at the world through the lens of places like Google, that became the right thing to do.

It’s interesting because I’ve been reading about Google, Amazon, and all of these other folks. In the last few months, Facebook for instance, Zuckerberg has been out there saying, “Efficiency.” What efficiency mean is we’re going to cut costs and get your butts back in the seats and drive. Like what you said about the limited time off, I’ve got construction CEOs rolling around on the floor laughing. They fell out of their seats. They just drove off the road or something like that. Mike, this is construction. How does that work? Don’t people take advantage of you as you’re putting that kind of policy in place?

It’s incredible. When you have a staff that’s doing all they can to support the company and you’ve got the company doing all they can do to support the staff, it’s magical. For the company, supporting the staff and inviting things like unlimited time off are a no-brainer, but it only works if you have a team and staff that is doing all they can to support you. That’s the key. We talk about that orientation where I care much more about where your heart is at as a staff member.

Are you here just to punch a clock? If that’s the case, there is no problem with that. It’s not here. Are you here to change the world or this industry to make it better for future generations? Let’s tackle that together. If all of us are thinking that way, then I don’t care if you’ve got something to do with your daughter’s gymnastics or something. Go for it. I want you to live a good personal life and let’s make sure we’re changing the world. When you get those kinds of people, time off is not an issue.

If I’ve got plumber X or electrician Y and we’ve got to get this in, they call me the night before and say, “I got something I got to take care of,” how does that then work?

We do expect people to be mindful. We do have a schedule. Every five hours, there’s another deadline. In fact, for some teams, it’s down to every dozens of minutes. There are a few different things. In a particular team, we have sub-teams that are working in different parts of the construction, and then one of the sub-teams might be what we consider off-batch work. That off-batch team will come and sub and help with whoever someone needs to take time off, bridge, or be gone at that time so the main production doesn’t stop.

Another part of it is communication. You got to let us know in advance unless it’s some surprise that you want to take time off. We also want to make sure that not everyone is taking time off at the same time. There is some coordination that goes on there. What we say is that we hire great people. Act like adults. Make sure you got to get the production running and we’re doing it in a way that the production doesn’t stop.

I think it’s important because if you do commit to hiring the right people, then those people will not take advantage of you by definition but it’s being willing to make that commitment yourself. That I think is going to be the challenge for most people. With that in mind, Mike, if someone is reading and thinking about, “I want to go on this journey of reducing costs and it’s a combination of me being able to get the right people in the right position doing the right things.” What are 2 or 3 action steps someone should take immediately to begin on this journey?

First and foremost, make sure you’re committed to it. One thing I’ve learned is that your culture is a reflection of your mindset because there are subtle things that you do that you don’t even realize you’re doing. There are sudden cues. There are things you’re not saying or maybe you should be saying that is speaking so much louder than what you think you are saying. Unless you are fully bought in with whatever direction, culture, or vision you have, it’s not going to pan out.

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If your heart is in, “I want to make a ton of money so I can go sit on the beach,” you’re never going to make it. It’s not going to function properly. Get your heart, your mind, and your soul all in alignment first. Once you have done that hard work, then it’s evaluating your team. If you are now a different person, I’m guessing the team that you hired is more a reflection of the old you rather than the new you. We put together a four-step test. It’s multiple levels for people to go through. We evaluated every person in depth.

What was that four-step test, if you don’t mind me asking?

We had a skills assessment for each trade. Sometimes, it was as simple as, “Can you read a tape measure?” We didn’t have much of a hiring bar back then, but you’d be shocked at how many people claim to have construction skills but can’t read a tape measure. It’s shocking. There is a value-based assessment, and then there is a coworker assessment. We went through and sat down with every single employee on your team, evaluated that person, and got direct feedback. It was a manager’s feedback. We combined all those scores together to figure out who were the best ones and who were the weak ones on the team.

Get aligned with yourself and evaluate your team. What was the next step there?

Part of evaluating is letting the bad one go. I would say get serious about your hiring practices. For us, what serious meant is we hired a bunch of recruiters. I don’t know exactly the problems and things that you face now in hiring and finding the right people but find honest solutions to that. I often talk to business leaders in meetings and they say, “It’s hard to find great people.” I hear people complaining all the time, but there are solutions if you are willing to invest the time and energy to solve it. Take the step to solve that if it’s truly important to you to hire the right people. That’s maybe step three.

If there’s one takeaway, I want to nail this one down. If you can hire your own recruiter or recruiters, right there is a leverage point that every contractor of any kind of revenue can take advantage of. Let me ask you, and this is a weeds question. In terms of recruitment, do you use any assessments that they take in the recruiting process? What’s your experience been with that?

We tested that out a little bit, but we found that it wasn’t good enough for what we needed. There are too many false positives and false negatives, so we decided to pull back out of that. It’s a little bit more manual and there’s more energy involved, but it’s a very human process for us right now.

Mike, you’ve been very generous with your time. I appreciate your insights. Tell us a little bit more about how people could get in touch with you if they wanted to and a little bit more about your company.

You can learn more about us by visiting Norhart.com. Even if you visit our website, it does not look like a construction website. There might be some hints and tips to change the way you look at things. We have a number of shows now and one of the new shows is called Zero to Unicorn. It’s about the journey of a small business growing from nothing and losing everything to a billion-dollar enterprise and what that journey is like. If you find some of these things interesting, you might find that show is interesting as well.

Mike, again, thank you so much for joining us here on the show.

Thanks for having me. This is fun.

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That was awesome. I appreciate Mike’s time. Thank you for tuning in. I hope that one of the takeaways you get from this discussion is hiring your own in-house recruiter. You may not get sixteen right away, but what if you hired one? What if you invested $100,000 or $150,000 in that one person who is dedicated to bringing on the right person and putting them in the right position in your organization? Is that a viable idea for you? I would submit to you that it is and that it’s something that you should seriously consider. Feel free to give us a rating or a review wherever you get your shows. Thank you for reading, and we’ll catch you on the next episode.

 

Important Links

• Norhart
• No Rules Rules
• Norhart Invest
• Zero to Unicorn – YouTube
• https://www.Facebook.com/Norhart
• https://Twitter.com/Norhart
• https://Twitter.com/MikeKaeding
• https://www.LinkedIn.com/company/Norhart/
• https://www.Instagram.com/NorhartLife/
• https://www.LinkedIn.com/in/MikeKaeding/

Mike Kaeding is the CEO of Norhart. Norhart designs, builds, and rents apartments. They are transforming the way apartments are built and managed by incorporating technologies and efficiencies that have revolutionized other industries, and lead to high-quality, cost-effective projects.

Mike’s parents started their family business. But just a few years after joining the business, Mike’s father unexpectedly passed away. Suddenly, Mike had what felt like the weight of the world on his shoulders. He had to lead this business with no preconceived notion of “the way things are done” in this industry. He was struggling to the point where the city briefly shut him down. This shattered his world. Norhart just naively started to solve problems after that incident. And that led to magic.

Norhart began changing the way construction is done. Starting with an attractive culture unique to the construction industry they hired the best talent. Together Norhart solved chronic construction inefficiencies, applied techniques from manufacturing, and integrated traditionally unaffiliated trades. This resulted in higher quality and lower cost projects.

Norhart’s mission is to solve America’s housing shortage by transforming the way apartments are built and managed. And in doing so we will improve the way we all live.