Project Management

How NOT To Calculate The Impact Of A Shutdown

From the Game Theory in Management Blog
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Modelling Business Decisions and their Consequences

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A few weeks back I blogged about the appropriate way of calculating the impact of the COVID-19 shutdown on our organizations, and pointed out one method that will probably be pushed as valid, but really isn’t. This week I want to take on perhaps the mother of all wrong methods for calculating the impact of a Black Swan event[i], one rooted in several highly questionable but widely accepted premises of modern management science theories. To be clear, I’m only referring to these notions as “theories” due to their rate of acceptance, not because they have been suitably verified (or tested, really) with empirical data or repeatable experiments.

Let’s work backwards from the actual analytic approach under my microscope, shall we? My sense is that there are going to be hundreds, if not thousands, of executives who will request their cost performance experts to quantify the cost impact of the slow/shutdown by pouring through General Ledger data, line by line, and identify which costs are attributable to the slow/shutdown, and which are not. I hold this to be an invalid approach, for the following reasons:

  • In order for such an analysis to be remotely reliable, the ones poring over the data must be fluent in the differences between proximate cause, and material cause. The former is a clear and direct causal factor, from one event to another, similar to domino #1 falling over and forcing domino #2 to also fall. Material cause, on the other hand, must pass the if-not-for test, as in domino #2 would not have fallen from domino #1’s toppling if not for someone standing it up in close proximity to domino #1 in the first place.
  • If the case for material cause can be made, the next impossibility would be to quantify how much responsibility, expressed objectively, should be split between the proximate causes and material one(s). Commercial and civil liability cases involving a jury setting the percentages of the culpability of the various defendants usually turn on such an analysis, and even here the findings often defy logic. In the domino example, we know that domino #2 fell. Let’s pretend that this had a serious, negative impact on our organization. What percentage of the total damages should be assigned to the person who knocked over domino #1, and how much should be assigned to the person who placed them upright so close to each other?
  • If the previous bullet appears next to impossible to quantify, consider how ridiculously simple that example is compared to the near-chaotic environment of the near-infinite working parts of the local economy, let alone the regional, national, or global variety.
  • In the face of such dizzying analysis parameters, how many of the executives ordering just such an analysis do you suppose will do so equipped with a readily-understandable guide, or template, usable as a sort of litmus test for every single line item in the General Ledger?
  • And, in those rare instances where such guidance is provided, I can guarantee that none of them can preclude multiple exceptions. Some costs believed to be attributable to the shutdown, but actually had nothing to do with it, will be included in the tally, and vice-versa. Metcalf’s Law, also known as The Butterfly Effect[ii], virtually guarantees it.

Pulling the thread a bit further, it’s easy to see why the poring-through-the-General-Ledger approach is often considered the obvious way of approaching the impact quantification problem: generations of business degree holders have been taught that the General Ledger is the source and residence of all management information that has a currency symbol in front of it. Recall, however, my oft-stated distinctions between the three types of management:

  • Asset Management is centered on the organization’s assets, and its main tool is the General Ledger;
  • Project Management focusses on customer-generated performance standards of scope, cost, and schedule, with its main information streams based on Earned Value and Critical Path Methodologies;
  • Strategic Management is all about relative market share.

Now ask yourself, where in the balance sheet or profit-and-loss statement can we see information about your organization’s market share percentages? Of course, it’s not there. That’s not what those reports convey. Then why should anybody expect them to show the cost or schedule performance impact of a pandemic? Unless COVID-19 destroyed or harmed a company asset, the General Ledger simply cannot convey any meaningful quantification of the impact of the pandemic on the organization, save the singular data point, relative revenue changes.

And that, GTIM Nation, is NOT how one quantifies the impact of a shutdown.

 

 


[i] See Nassim Taleb’s outstanding book, The Black Swan; The Impact of the Highly Improbable, Random House, 2007.

[ii] Usually expressed as the question “If a butterfly flaps its wings in Brazil, does it cause a hurricane in Texas?,” the more formal definition is that relatively small perturbations in far-flung nodes of a large network can have a cascading effect, bringing massive changes to nodes on the other extreme of said network.

Posted on: May 18, 2020 11:22 PM | Permalink

Comments (3)

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interesting read. hopefully we don't see anything else like this in our lifetimes.

Hi Michael, as you said the impact is going to be reflected in the balance of the Financial Area, but to be aware of the risks is crucial for a PM

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