Game Theory in Management

Before I launch into my problem with In Search Of Excellence (Harper Collins, 1982) by Tom Peters and Robert Waterman, I want to state up-front why it’s awesome. It’s refreshingly free of a priori assertions common to so many other business writings. Instead of pumping up their academic credentials and telling us how they thought the business world ought to operate, Peters and Waterman went out to organizations that were actually successful, and asked them to what they attributed that success. Distilling the results into eight characteristics of successful companies,

• a bias for action,
• staying close to the customer,
• autonomy and entrepreneurship,
• productivity through people,
• hands-on, value-driven,
• stick to the knitting,
• simple form, lean staff,
• simultaneous loose-tight properties,

…the book relays what has already been observed to work. Up to the time of its publishing, In Search of Excellence’s predecessors as the must-read books in business schools everywhere were written by Peter Drucker, whose writings had a far more top-down, way-it-ought-to-be tone. By taking a scientific approach to the business world, Peters and Waterman not only reset the conditions by which organizations were considered successful, they redefined what constituted successful writing about the management sciences.

“So, Michael” I can hear GTIM Nation say, “for a book that you admire, a massive best-seller, a virtual must-have for anyone with the word ‘manager’ in their title, what on Earth can you have against it?” The same thing that afflicts so many other business theories, books, articles, or paper presentations: it does not appear to have a limiting factor.

Back when I was writing The Variance Threshold column for PM Network, I once made a snarky comment that, to fully embrace Peters’ and Waterman’s theories, the business owner should give away all of the company’s assets to the next person who presents themselves as a “customer.” I’m in total agreement with the notion that successful organizations need an intense focus on fulfilling the customers’ wants and needs – I’m just wary of the fact that there does not appear to be a limiting factor. Retailers, for example, are infamous for operating under the axiom “the customer is always right.” And yet, even here they will (usually) not accept for refund or exchange a product they sold that has clearly been abused to the point of breakage. Obviously some level of limiting factors are in play, even if they’re not actually codified into some sort of procedure.

The absence of limiting factors is another reason why I pay the risk managers (no initial caps) no mind. In the March 2008 edition of PM Network, I engaged in a point/counterpoint discussion with Dave Hillson on a variety of risk management (NIC) topics, particularly whether or not it also encompassed “opportunity management” (whatever that is). After a segment where David discussed his usage or definitions of three different terms, I noted:

David, you redefined risk as uncertainty that matters. If the PMI Risk Specific Interest Group or special experts such as yourself have that latitude to redefine those terms in that fashion, then essentially, there's no aspect of project management that could be fairly said to lie outside the purview of risk management.[i]

Essentially, if the experts can’t tell you what something isn’t, then they really can’t tell you what it is.

The same is true of the Asset Managers’ favorite maxim, that the point of all management is to maximize shareholder wealth. If that were the case, then there would be no aspect of management – particularly and especially Project Management – that was outside of their scope, and that’s simply not the case. Nor is it true in the realm of Strategic Management, which seeks to maximize, not shareholder wealth, but market share. Since things like competitor buy-outs definitely help increase market share while hitting the profit-and-loss statement pretty hard, it’s fairly clear to me that the realm of Strategic Management provides a rather distinct limiting factor to the efficacy of at least one of the Asset Managers’ tropes.

Which brings us back to Peters and Waterman. Their message was sorely needed at a time when the Asset Managers’ rules permeated the business world, when PMI® was gaining a truly global standing by establishing a management model based on the customers’ expectations of Scope, Cost, and Schedule. An enhanced focus on the customer is excellent, but to have its desired effect the axiom “Quality – Availability – Affordability: pick any two” must inform the business model. Otherwise, it’s impossible to know at what point the limiting factor has been reached.

And you just might end up crashing the organization in the name of staying close to the customer.

[i] Hatfield, M. & Hillson, D. (2008). Danger ahead?: Some project managers contend there's a silver lining in risk management; others say it's called opportunity. PM Network, 22(3), 76–80.

The risk management (no initial caps) practitioners are very fond of setting up elaborate risk management (no initial caps) baselines and risk registers, collecting data, processing it using various Gaussian Curve-based techniques, and delivering … well, what, precisely? Now, before said risk management (no initial caps) practitioners flood the comments section citing their preferred artifacts, let me add in just one criterion: the output has to actually inform a project-changing decision or strategy.

Some years back I came across a story about one of the earliest college-level statistics courses ever offered, where the instructor started off the first class by producing a coin from his pocket, and announcing that, when he flips the coin, there can only be one of two outcomes: it lands with the “heads” side up (showing, in relief, the image of a person), or the not-heads side (in American parlance, this would be “tails”). He then proceeded to flip the coin. According to the story, the coin landed and stayed on its edge. I don’t know if it managed to find a crack in the floor, or if it simply spun on edge until it came to rest in the vertical position. I don’t even know if the story is true, but it does illustrate something about risk management (rather than keep typing “no initial caps,” I’m just going to use the acronym “NIC”), that, no matter how hard we try, we can never capture every possible outcome to a given situation, even one as controlled as a simple coin flip.

The same phenomenon often comes into effect when discussing Game Theory. One classic example involves the Ultimatum Game, where a researcher approaches two people (Person 1 and Person 2), and offers Person 1 this deal: the researcher will give the Persons $100 (USD) if Person 1 can provide an arrangement for how the money will be split between the two Persons, and that proposal is accepted by Person 2 on the first try. The Game Theorists calculated speculated that Person 1 would maximize their payoff by proposing $99 for Person 1, and just $1 for Person 2, under the theory that Person 2, looking at receiving either $1 or nothing at all, would (naturally!) approve of this distribution scheme. In reality, such offers were almost always rejected by Persons 2. Perhaps the Persons 2 felt that the Persons 1 were being unfair, or didn’t deserve such a lopsided distribution of unearned largess, or was somehow being disrespectful. Interestingly, when the actual evidence of the Game Theorists’ wildly inaccurate calculation speculation of the optimal distribution scheme was shown to them, a common reaction was to blame “cultural factors” rather than admit that their core assumptions were flawed.

Something very similar occurs when risk managers (NIC) become aware of unforeseen negative events happening to the projects to which they are assigned that receive absolutely no mention in the risk register, or any other document, for that matter. Instead of “cultural factors,” though, the risk managers (NIC) will invoke the “unknown unknowns” category of risk events to escape such obvious evidence of the absence of validity undergirding their analyses.

But I want to take a look at what happens even on those occasions where something happens to the project they’re working, and that something is referenced in the risk register. In the simplest analogy, a project to flip a fair coin would feature a risk analyst informing the PM-coin flipper that the odds of either pre-flip choice coming about is 50/50 (assuming that no coin-holding cracks are present in the floor). How does this inform the decision to pick one side or the other? Keep in mind that this example is one of the most limited-outcome scenarios that could possibly exist. Also, such outcomes are almost always driven by randomness, unless the coin flipper has acquired the skills needed to flip the coin so precisely as to arrive at a pre-determined outcome. While randomness does afflict Project Management, if that was the sole determining factor of project outcome there would be absolutely no reason to have an educated or talented Project Team. 

So, in the PM environment, we’re looking at two aspects that absolutely blow to smithereens any credibility the risk managers (NIC) would otherwise have left:

• The PM’s actions are not random, and therefore do not match any pattern that would otherwise inform an analysis based on Gaussian curves, and
• The environment is far from controlled with respect to its potential outcomes.

With these two factors irrevocably in play, there is simply no output, no report derived from risk management (NIC) or risk analysis (ditto) that can be specific enough to inform a particular decision or tactic. But a lot of time, effort, and expertise goes into such analyses, doesn’t it?

Project Managers, by definition, grapple with obstacles to completing their defined scope, within budget and time constraints, virtually every working day of their lives. I won’t expand the definition to “problem solvers,” since that’s what every working person on the planet does, but I will point to a specific pair of problems that seem to confront PMs all the time, but are truly insidious in that they don’t necessarily present as obstacles to achieving project objectives. In fact, these barriers I want to discuss come across as the exact opposite, as if they’re there to help.

They are not.

When I was working my first book, Things Your PMO Is Doing Wrong (PMI Publishing, 2008), I had some conversations with the excellent Bud Baker, Professor of Management at Wright State University, about a management phenomenon known as the “silent veto.” This is where an organization is attempting to advance a certain capability maturity, and the existing personnel claim to be on-board with the initiative, but when it comes time to actually implement the new aspects of the business model they simply don’t contribute. The implementation grinds to a halt, and those responsible for getting that particular job done suffer the consequences. Bud pointed out an even more insidious variation, the “slow roll.” This is where the members of the organization tasked with performing the tasks involved in such initiatives aren’t really in a position to be as blatantly non-contributing as the silent veto-ers (such as in the military), so they claim up-front to be totally copacetic with the efforts, and even actually contribute – just not enough to achieve success. The slow-rollers gain a sense of how much effort is behind the initiative, and will mete out their backing efforts at the precise rate needed to appear to be helping, but not enough for project success. After too much time has elapsed in pursuing the new objectives, frustration sets in, funding is withdrawn, and those responsible for getting that particular job done suffer the consequences.

Next up is a business model pathology largely attributable to our friends, the Asset Managers, and has to do with a claim to duplicating effort. As I have written in this blog previously and extensively, the Asset Managers’ overriding theme of “maximizing shareholder wealth” is so intellectually vacuous that it astounds me that it’s still being taught as supposedly advanced business schools, but it is a prevalent presence in most organization’s management culture. The way it tends to impact PMs specifically has to do with specific functions needed for specific project work. Say your project has an extensive number of items requiring inventory, and the spreadsheets aren’t doing a sufficient job of keeping everything straight. These items are already being tracked by the general ledger, since they had to be procured in the first place, so that your need for enhanced inventory management has nothing to do with the balance sheet. But, when you arrange to purchase an off-the-shelf inventory system, somebody pops up and states “You can’t do that. We already have an inventory system, and we don’t want to duplicate effort.” Is this extant inventory system available to your project team right now? Is it less expensive than the alternative? Can it easily and quickly isolate the inventory germane to your particular project? Will an additional system actually harm the organization’s overarching Management Information System Program? Unless the answer to every single one of these questions is an unqualified “yes,” the “can’t duplicate effort” objection is irrelevant and invalid. Why not duplicate effort? If the project can afford it, whom, exactly, is being harmed?

The reason I’ve tagged these two phenomena with the “insidious” label is because they pretend to help your project while doing the exact opposite. The slow-rollers will point to any effort that they’ve put in to the achievement of project goals as proof that they are contributing, all the while knowing that they’re not doing enough, in time. The can’t-duplicate-effort crowd will insist that their position is entirely reasonable, common sense-driven, and even obvious to everyone involved, since, in this mindset, duplicated effort equals wasted effort. But the project that has been completed with absolutely no waste doesn’t exist, and to pretend otherwise is nothing more than managerial kibbitzing. Imagine trying to estimate resources where absolutely no “duplication of effort” takes place, where every single activity had exactly zero overlap from function to function. Even attempting to eliminate any form of redundancy is virtually guaranteed to generate functional gaps, schedule delays, and overruns.

These two tactics don’t help, they hinder, and those who perpetrate them are naïve. Or insidious

The famous television drama Dallas had a reboot, starting in 2012 and lasting for three seasons. It brought back three main characters from the original series, Sue Ellen, Bobby, and, of course, J.R. Ewing, some familiar characters (Cliff Barnes), and adult versions of J.R.’s and Bobby’s sons, John Ross and Christopher, respectively. I think part of the reason that the original version was so successful had to do with the steady and predictable nature of the inter-character conflicts. J.R. was the perennial villain, but it was actually pretty easy to root for this character to prevail against the always irksome Cliff, the constantly righteous Bobby, or the equally-villainous-but-not-as-clever Jeremy Windell, head of rival WestStar Oil.

But the reboot didn’t maintain this predictability. Characters who were introduced early in Season 1 who presented as clear-cut protagonists would later become extreme antagonists (Christopher Ewing’s fiancé), and vice-versa (Bobby’s wife’s ex-husband). Keeping track of who was aligned with (or now set against) whom became a dizzying affair (pun intended), as the network among the known characters seemed to endure major re-alignments, and on a consistent basis.

Just one year prior to the Dallas reboot, the ABC network launched a series entitled Revenge. Loosely based on Alexander Dumas’ book The Count of Monte Cristo, Revenge took place in The Hamptons, and followed the attempts of the suddenly-wealthy Emily Thorne to extract revenge against the people who betrayed and conspired to murder her late father. I must confess that I was among this show’s early enthusiasts, until something unusual began to happen. Characters who presented as clear-cut protagonists would swerve into the antagonist’s category, and back again. Keeping up with who was allied or opposed to whom became a dizzying affair. As plot lines began to hemorrhage plausibility trying to keep up with the making/maintaining/breaking/re-establishing alliances among the characters, ratings suffered. Both the Dallas reboot and Revenge were cancelled in 2014.

Meanwhile, Back In The Project Management World…

GTIM Nation is aware of the axiom “Quality, Affordability, Availability: pick any two.” When an organization seeks to set up or renew its Program Management Office (PMO), it’s often due to a need or problem that requires a response, or at least the creation of an organization that’s capable of providing a specific remedy. I would venture a guess that, in most cases, the PMO’s genesis is rooted in an unfortunate tendency for the projects in the portfolio to overrun, come in late, or both. The PMO gets set up and, with the introduction of some basic Earned Value and Critical Path Methodology systems, managers are suddenly making much more informed – better – decisions, and the frequency of late and over-budget completions is reduced, or even eliminated, or at the very least everyone has a legitimate early-warning when things are about to head off of the rails. In other words, a quality PM service has now been provided. And here is where the trouble often begins.

Whispered criticisms of the cost of the PMO become spoken complaints in the board room. The PMO Director will usually put up a decent initial defense, but our friends, the accountants, will continue to increase pressure to “reduce costs.” At this point the PMO Director has a choice: either reduce his talent pool, or make them less available for the level of demand, all to make the PMO more affordable. In essence, the Asset Managers have made one of the decisions key to the PMO’s long-term strategy, that it must be “affordable.” Unfortunately, the high-level talent that led to the portfolio’s performance turnaround rarely want to be seen as “affordable.” They expect to be paid commiserate with their contribution and, if they’re not, will leave. Make no mistake: setting up a training program to help move entry-level Project Controllers to mid-level, and mid-levels to advanced, is not an automatic solution. Such programs are not cheap.

What’s the solution? Admittedly painting with a very broad brush here, my recommendation would be: establish which two of the Quality-Affordability-Availability triad will serve as the PMO strategic foundation, and stick to them. Know that whichever aspect is the one not central to the strategy will become the focus, not of criticism, but of condemnation:

• The affordable, available system will be condemned for not being good enough;
• The affordable, quality system will be condemned for the waiting period for implementation;
• The quality, available system will be automatically condemned by our friends, the accountants, for costing too much.

But you, PMO Director person, must stick to your strategy. Know that these condemnations are coming your way, and be prepared to counter them. Otherwise, you run the risk of trying to correct the condemnation du jour, losing strategic direction and integrity, and ultimately getting cancelled.

And not even setting up the “Who shot J.R.?” cliffhanger will save you.

Yeah, I know PMI® would just assume that only people of good character and are willing to abide by its code of ethics should receive the Project Management Professional certification, but hear me out on this. While Vader’s appearance, sounds from his labored breathing, and expertise with a light saber are all captivating aspects of the character, when we actually look past these visually amazing distractions we are presented with direct knowledge of his “scope” in each of the three original movies in the initial trilogy:

• Star Wars (later re-titled A New Hope) – retrieve the stolen plans to the first Death Star.
• The Empire Strikes Back – capture the Millennium Falcon, with its crew and passengers alive.
• The Return of the Jedi – capture Luke Skywalker, and deliver him to Emperor Palpatine.

In previous blogs I have made the distinction between Project Management, Asset Management, and Strategic Management, so:

• Asset Managers seek to “maximize shareholder wealth,” and their primary information source is the general ledger.
• Project Managers seek to execute their defined scope and accomplish it under the customer-driven parameters of cost and schedule. Earned Value and Critical Path Methodologies drive their information streams.
• Strategic Managers seek to maximize market share in whichever industry their organizations belong.

It seems to me that, in virtually every line of dialogue emanating from Darth Vader, he clearly places himself into the PM bin. For example, when he boards Princess Leia’s starship and is informed that the plans to the Death Star – which he knows have been transmitted to the ship – aren’t on board, he immediately surmises that the plans must have been put into one of the escape pods that had been ejected during or immediately after the battle. What would each of the management types have said at this point?

1. “Perform an evaluation of the Return on Investment for the effort of sending an entire battalion of the Empire’s best men to locate one specific escape pod. If the analysis returns a number greater than one, go ahead and do it. Otherwise, it won’t be worth it.”
2. “She must have hidden the plans in the escape pod. Send a detachment down to retrieve them. See to it personally, Commander.”
3. “I’m just not seeing how retrieving those plans will translate into more star systems joining our Empire.”

Before you write down your selection’s number, consider which response is most closely aligned with the scope statements for each movie from the first bulleted list, and then proceed to mental exercise number two.

In The Empire Strikes Back, Vader is determined to capture Han Solo’s ship, the Millennium Falcon, along with its passengers and crew. When the fleet of Imperial Star Destroyers – rather large, ponderous ships – find her, she escapes into an asteroid field. Newly-minted Admiral Piett informs Vader that the fleet dare not follow the far more nimble Millennium Falcon into the asteroid field, due to the excessive damage they can expect to endure. Again, which statement is most closely aligned with the Project Management approach?

1. “Thank you for that insight, Admiral. Our people are our greatest asset. Could I trouble you to perform another cost-impact analysis of having the fleet enter the asteroid field?”
2. “Asteroids do not concern me, Admiral. I want that ship, not excuses.”
3. “I’m sure the Emperor wouldn’t want to risk half the fleet in an endeavor that won’t add to the number of star systems under his purview.”

Write down your answer, and proceed to mental exercise number three.

In Return of the Jedi, Vader receives a prophecy from Emperor Palpatine himself, that (spoiler alert!) Vader’s son, Luke Skywalker, will seek Vader out, somewhat undermining Vader’s proposed scope of tracking down and capturing Luke himself. Nevertheless, Vader begins to search for Luke and, just as Palpatine had foretold, is surprised when Luke surrenders himself on the forest moon of Endor. Vader takes possession of Luke’s lightsaber, and, after ordering the guards to leave them alone, has a conversation with Luke where Luke urges Vader to abandon the dark side, and join the Rebellion. Again, which response is most consistent with a PM approach?

1. “After all of the assets we’ve spent leading up to my presenting you, captive, to the Emperor, based on the invalidity of the Sunk Cost fallacy, I’m going to let you go now.”
2. “You don’t know the power of the dark side. I must complete my scope obey my master.”
3. “Yeah, I’m still not getting how this is going to add to the star system total. Is it happy hour yet?”

Since GTIM Nation is known for its management acumen, I’m going to go ahead and predict that everybody’s answers are all twos, proving that Darth Vader was clearly PMP® material.

He may have even ended up writing a blog for ProjectManagement.com, under the pen name “Michael.”