Game Theory in Management

As my regular readers know, I have long maintained that the 20% worst managers who are in command of 80% of the information they need to obviate any given decision will consistently out-perform the 80^th percentile best managers who have only 20% of the information so needed. Combine this with the age-old axiom that information is the life-blood of the organization, and what do you have? An inescapable conclusion: there are going to be people in the organization who will attempt to manipulate – if not out-and-out control – the flow of needed information in order to advance their own personal agendas.

It’s unavoidable.

But it’s not as if the information stream dammers and sluicers have a completely easy time of it. To the extent that chief executives are unclear on which bits of information are relevant, trying to anticipate what data collection activities and processes need to be controlled can be next to impossible. Much like Stan Lee, who seemingly can only go a couple of years before re-telling the story of the origin of Spider-Man, I really like to tell this illustrative story. I once worked for a small engineering company that had no idea how to project future revenues. None whatsoever. But there was no shortage of those who presented as if they knew. During a multi-branch conference call, one out-of-town (and out-of-touch) manager posited that their revenue projections should be based on the number of engineers on staff, multiplied by their billing rates!

“That’s not how you project revenues.” I stated flatly, drawing looks from the execs around the boardroom where I sat, both irked and astonished.

“One crude but effective way would be to assess the win rate of each office, multiply that figure by their existing proposal backlog, and time-phase that figure by the periods of performance.” I continued.

The company’s CEO scoffed, “I don’t want to prescribe any specific formula…”

“Then take the contract win rate by type of work rather than geographic placement, sort the proposal backlog by that figure, multiply the two, time-phase that figure, and you have your answer.”

“Again” the CEO re-scoffed, “I don’t want to prescribe any specific formula, but everyone’s projections are due by the end of the week!”

After the meeting I approached the CEO for a side-bar.

“Don, if I could produce the kind of information you’re looking for on this revenue projection business, and demonstrate that my approach is superior to the ones being undertaken by the various offices, would you at least look at those reports?”

“Knock yourself out.”

I was in an enviable position. As Project Controls Manager, I had no narrative to support or defeat, no allies to buttress nor enemies to put down. All I had to do was collect some readily available data, use the proper process, and push out the (extremely valuable, of course) information stream.

Long story short (too late!), the CEO as well as the owner of the company came to eagerly anticipate the revenue projection reports that emanated from the (rather basic) analysis of the contract win rates and proposal backlog, sorted by various criterion.

However, I made a lot of enemies in the process. All at once, here was an extremely valuable information stream, going straight to the CEO, that couldn’t be diverted, dammed, or manipulated by those in the organization who had narratives to defend, narratives to advance. The long knives came out, and I was working elsewhere within months. So, too, were all of the other people in the company, its having been bought out and closed down within a couple of years.

But it did teach me a couple of valuable lessons which I’m happy to pass along to my priceless readers:

·         Being right makes you more valuable to the organization, but it also makes you a target, and

·         Those who view themselves as the dispenser of valuable management information to the executives will do what’s needed to avoid being usurped.

So, continue what you’re doing, and do your best to provide those needed (relevant!) management information streams.

Just watch your back.

“You must unlearn what you have learned.”

In my previous blog(s) I have addressed how much of what passes for insightful management science, as taught at the college level, is really rather silly stuff. From the assertion that the purpose of all management is “to maximize shareholder wealth,” all the way down to risk management types being able to quantify the future, a whole lot of drivel masquerading as sophisticated analysis has been introduced to the business decision-making process, at all levels of the organization. What is there to do about it?

Well, Yoda has a point in the previous quote. And it may very well be that a small band of truly enlightened Jedi (strikethrough) managers do succeed in turning the great ship of management science towards a set of structured ideas that far more accurately reflect what’s happening in the real microeconomic universe.

But I kind of doubt it.

I think far more likely scenario unfolds where professionals who are blissfully free from having been indoctrinated in the standard MBA fare will find themselves in positions to make managerial decisions, and will make better ones than their counterparts enmired in the drivel.

“Judge me by my size, do you?”

And where, exactly, will these non-indoctrinated managers learn the more advanced tricks of their trade? Actually, that’s kind of an easy question, being, as we are, in the midst of an information technology revolution. The most obvious places would be web sites such as ProjectManagement.com. There are also myriad books, many of them best-sellers, that directly challenge many of the precepts of standard management science. For example, I’m convinced nobody can read Nassim Taleb’s The Black Swan, the Impact of the Highly Improbable, and then sit through a paper presentation given by a risk management-type without erupting into a fit of the giggles. Michael Crichton, in his CalTech/Michelin Lecture series speech “Aliens Cause Global Warming,” points out the irrefutable fact that consensus is not science, and science has nothing to do with consensus, period. All “science” needs is a single researcher who happens to be right, and can reproduce her results in the laboratory. Management science is somewhat removed from the hard sciences, in that it’s impossible for us to isolate the parameters of the experiments we need to test our theories; however, Crichton’s basic assertions are perfectly transferable. It doesn’t really matter if most business school professors insist that the point of all management is to maximize shareholder wealth – those in the real world who know better will outperform their “better educated” associates, and in obvious ways.

“For once you start down the dark path, forever will it dominate your destiny.”

Pick up a typical university-level textbook on quantitative analysis in business, and thumb through it. Pretty daunting stuff, no? Even after having survived accounting, finance, statistics, and micro and macroeconomics, I remember being pretty freaked out when I bought my text on the subject. But after immense amounts of effort and time, ingest the material I did. Imagine, then, my consternation when additional scholarship led me to question its precepts, and then to come to the conclusion that most of it was profoundly misguided. I didn’t want to give up on that knowledge! It made me more capable than those who hadn’t been as “educated!”  The accountants have a saying that you should never invoke the sunk cost argument while contributing to a business discussion on whether or not to continue with a given project. While that may be easy to observe in an organizational setting, personally it’s very, very hard. Once someone has devoted significant time and effort to any given structured set of ideas – religion, politics, how to manage – getting them to realize that they may be in error is next to impossible, much less convincing them to reverse course. But I’m reminded of an old Turkish saying – “It’s never too late to turn back from the wrong path.”

While Yoda’s sage wisdom was certainly true in most cases, the whole bit about “forever dominating your destiny” wasn’t so with Darth Vader/Aniken Skywalker, was it? I suppose 800-year-old fictional aliens are only so sanguine when it comes to portfolio management…

Is there a dark side to portfolio management? You bet your tauntaun there is. In that famous mythological universe far, far away, adherents to The Dark Side are (usually) easily recognizable by being dressed head-to-foot in black, glowing yellow eyes, and a predilection for spreading misery during a personal quest for near-absolute power. In the management world, such external indicators are not usually present, at least not in such apparent manifestations; however, the signs are there, if you know what to look for.

As with The Force, the prime differences between the light and dark sides of portfolio management are centered on motivation. In the management world, there’s a certain naïve assumption that all businesses are ongoing concerns, and that managers seek to keep their enterprises going as long as possible. But that’s not what’s taught at college-level business schools around the world – they’re not instructed to “maximize shareholder wealth for as long as possible.” They’re simply taught to maximize shareholder wealth.

The differences between organizations that are on-going concerns and those that are not are as stark as those between Yoda and Emperor Palpatine. The ongoing concern will seek to enlarge its customer base by providing better, more economical products and services, whereas the organizations that have a pretty good idea of when their time is up will seek to exploit the existing customer base, maximizing the amount of money to be taken from them while minimizing the expense of providing goods or services.

The Dark-Side portfolio managers don’t (necessarily) taunt their perceived adversaries during one-on-one combat situations, but they do, by necessity, communicate differently. Organizations with a known term date range simply can’t be honest in their communications with employees or customers, since such honesty would dramatically accelerate such organizations’ demise. Employees would know that they had better seek employment elsewhere, and the higher the level of talent, the quicker they will be able to do so. Likewise, customers would instantly recognize the futility of entering into or maintaining any kind of an economic relationship with such an organization, and explore alternatives (i.e., seek their desired goods/services from providers who can be expected to be available long-term).

Okay, so if these portfolio managers’ eyes don’t glow yellow, how are their Dark Sided motives displayed? Consider the following table:

“For once you start down the Dark path, forever will it dominate your destiny!” While much of what is offered up as galactic theology in Star Wars sounds like it was written by a fortune cookie fortune writer on drugs, Yoda was largely correct about this particular insight, which leads me to speculate: which side is more consistent with the whole “maximize shareholder wealth” meme?

I’ve recently received a rash of e-mails and snail-mails, offering classes on how to become a better business writer. The one I received on Friday had in-between my name and the rest of my mailing address an entry that was, I suppose, my profession: “Author, Blogger.” Now, I understand these things sometimes happen, and I’m sure virtually all of my readers who are already PMP®s still receive communications offering classes to attain the PMP®. Sometimes a reference to their PMP® is even included in the mailing address. I’ve even been spammed by a company in the Middle East that teaches portfolio management (ProjectManagement.com’s April theme) that uses my first book as its text (Things Your PMO Is Doing Wrong, PMI Publishing, 2008). But when I noticed the uptick in the number of business writing classes I was being offered, I had to stop to think – was this an attempt from Cameron to subtly let me know that I had to up my game? Did he pass my e-mail and contact information to these guys, or are the offerors really unaware that I’ve been writing professionally about business in general, and project management in particular, for some time? One of the brochures named its instructor, a fellow who apparently has never even published a book on business.

It’s not as if I could just shoot an e-mail to Cameron, saying, “Yo, Cameron, are you doing this?” For one, if he was behind this trend, then asking him if he was could be taken as an additional sign of my cluelessness. And, if he wasn’t, but I accused him of being behind it, then he would instantly recognize that I was overthinking it.

But, seriously, isn’t that what portfolio managers are supposed to do? Because when we start talking about PORTFOLIO MANAGEMENT (oooooh!), the automatic implication is that those engaged in that enterprise (pun intended) are soooo much more broad-minded than the rest of us project managers, mired, as we are, in our Agile, or Scrum, or Critical Path Method echo-chambers. Consider the following payoff grid (we Game Theory hacks love these things):

Now consider the portfolio manager, at the receiving end of a barrage of management information streams, situated similarly to a 50-pound catfish at the base of a dam’s spillway, trying to decide what’s good to eat (for a catfish, anyway), and what’s not. The information bits come streaming by, and they belong to one of the categories in the above table (Here’s an easy hint: virtually everything your risk manager tells you is in category 2). What’s the worst thing that a portfolio manager can do? Isn’t it to underthink things, to mis-identify something that is, in actuality, in category 4, as being instead from categories 1-3? And then, not acting on it until it’s too late? Clearly, if the error to avoid at all costs for the portfolio manager is to underthink things, then the only other two outcomes are to either think the exactly appropriate amount (which is next to impossible), or else to overthink them.

What the portfolio manager needs is a structure, a systemic method for identifying which information streams are truly relevant, and in what situations. Such a structure would take into account the three levels of information topics:

·         Internal to the organization;

·         External to the organization itself, but internal to its economic base (customers and potential customers), and, finally

·         External to both the organization and its customers, but internal to its business environment, i.e., the competition and government.

Some freakishly talented CEOs have a natural sense of how these three different management arenas interact and influence each other, but the rest of us could use a little help from our computers. So, how do you set up your management information systems to collect the pertinent data, process it correctly, and deliver the needed information to actually perform portfolio management? I cover this topic at length in my second book – or, you can just keep reading ProjectManagement.com blogs.

Assuming, of course, Cameron doesn’t fire me because he really was behind the whole writing-classes-marketing-onslaught thing, and I’m just not getting it.

A major sticking point in my ongoing feud with the risk management-types (you’d think that after Kevin Kostner’s excellent mini-series Hatfields and McCoys that the RM-types would avoid engaging in a feud with a Hatfield) was that, while definitions abound on what risk management is, they couldn’t define what it is not. The basic definition offered up by your typical RMer (and, in this case, Wikipedia) is as follows:

Risk management is the identification, assessment, and prioritization of risks (defined in ISO 31000 as the effect of uncertainty on objectives, whether positive or negative) followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities.[i]

Two things jump out at me from this: the effect of uncertainty on objectives? Really? (And don’t get me started on the dictionary-bending term “positive risk.”) Which kind of leads me to my previous point, that “uncertainties” abound in all of management, and these cannot be tamped down with hyperventilated Gaussian curve analysis.

Which brings us to April’s theme, portfolio management. The definitions I came across for portfolio management (watch out for Investopedia – many pop-ups) are similarly expansive, but that’s kind of the point – the whole notion of managing a “portfolio,” as opposed to a project, program, or organization, is that, somehow, the Portfolio Manager takes into account the things that his more myopic management siblings ignore, either because of irrelevancy or incompetence.  Did the billing rates for your organization’s designers just jump upward? Not the project manager’s fault – the handling of the assets isn’t his bailiwick. But the Portfolio Manager gets no such get-out-of-jail-free card. She must have a handle on such things, with a foreknowledge of the future implications of these developments, live-time, even as they unfold. And that, dear readers, is quite the trick.

But I know how it’s done, and how it’s done has to do with what portfolio management is not. Unlike risk management, portfolio management’s proper definition is expansive in the extreme, since it encompasses all other management functions. Since it’s the whole kit-and-kaboodle, it will naturally brush up against that age-old question: what is the point of management?

In business schools across the globe, the pat answer to that question is: to maximize shareholder wealth. To those myriad Ph.D.s who teach this, let me state unequivocally, you are either profoundly mistaken (at best), or frauds (at worst). The folly of “maximizing shareholder wealth” being the be-all and end-all of management has been shown to be invalid, time and again. I’ve taken many a shot at it, but certainly the seminal work in highlighting this silliness belongs to Tom Peters.

To their credit the project management crowd never tried to claim the mantle of being the ultimate point of management (except, tangentially, the risk managers, who have been taken to task by me and others).

Well, then, if portfolio management needs to be defined, and it is brushing up against a clearly articulable version of the ultimate goal of management in general, what’s the ultimate goal of management in general?

Okay, everybody, clear the gunwales, and brace yourselves: Hatfield, via ProjectManagement.com, is going to articulate said definition. The ultimate goal of management is to influence behaviors and decisions in such a way as to bring about a favorable economic outcome.

Yeah, I know, this definition is very broad. However, it can be broken down into its basic components, as I described in my must-have second book. I’ll also continue to discuss it as April’s theme unfolds.