Game Theory in Management

As many of my regular readers know, I hold much of what passes for modern risk management to be transparently fraudulent, little more than institutional worrying tripped out in Gaussian curve jargon. But it seems that whenever anybody starts writing about the management sciences, everything suddenly becomes anodyne, as if it’s in bad taste at best, rabidly antagonistic at worst, to actually challenge bad theory openly. I don’t get that (aha! sayest the risk managers… Hatfield’s too stupid to understand our concepts!).

But March’s theme is customer relations management, so I’d thought I’d combine the two subjects to analyze – well, how does the peddler of fraudulent management science manage his customers? Is it not through deceit? Certainly, but that implies that the multi-billion dollar risk management industry is built on a foundation of sand, and that at some point in the future no amount of customer relations “management” will suffice to keep the façade up and functioning.

Soooo…. how does the risk manager manage his customers, knowing (if he’s smart and intellectually honest) that his epistemological bubble is bound to eventually burst?  Well, it’s been my experience that their favorite tactic is to assert that, should any manager eschew performing risk analysis, that they are ipso facto either failing to do due diligence in their managing of the project, or else too, ahem, ignorant to understand the vital importance of doing risk management. However, to the PM savvy enough to not be bamboozled into spending tens of thousands (at least) to avoid being so tagged, a few questions might, just might, be in order, such as:

1.      Can your analysis accurately predict future events?

2.      If so, why aren’t you already incredibly rich?

3.      If not, why should I pay you tens of thousands of dollars for your analysis?

4.      If, as much of your literature claims, risk management must be performed throughout the life of the project, can you show me the output from the information stream that your analysis provides – on an ongoing basis – that actually helps me manage this project?

If the risk management fellow performing the pitch for his company’s work is honest, the answer to question #1 is “no.” If he isn’t, then question #2 should probably snare him.

Question #3 is where we start to get to the root of the matter. The typical risk management “analysis” involves interviews with you and your principals, answering questions such as “what might go wrong?” “what are the odds of that happening?,” and “what would the cost impact be?” However, if you and your principals are aware of the things that might go wrong on your project, what possible information advantage can be attained by guessing (cross through) estimating the odds of occurrence? Don’t your principals already know what might happen? Isn’t that why experienced managers are preferable to inexperienced ones?

Taking question #3 further, let’s say that one of your project leaders tells the RM-type that there’s a 10% chance of something happening that costs the project $10,000. If the event eventually happens, does the estimate reduce the impact? If it does not happen, didn’t you just waste the amount of time and money it took to document that there was a 10% chance of it happening?

The final nail in the risk managers’ epistemological coffin is the answer to question #4. No, there isn’t a report that can be provided on an ongoing basis, derived from continued use of risk analysis techniques, that helps manage projects. It simply doesn’t exist. If it did, it would be as ubiquitous as the Cost Performance Report (format 1), or the Gantt Chart, provably legitimate outputs from valid PM analyses. Alas, if an unforeseen event hits your project, then the risk analysis will have classified it as an “unknown unknown.” If the event was foreseen, then the risk analyst can say “I told you so,” without any further assistance to your new circumstances. And, finally, if the event didn’t happen, then the waste of time worrying about it possibly having happened becomes all the more blatant.

Ultimately, my advice to risk managers on the best way to “manage” your customer relations is this: don’t let your clients think through the overall risk management process, ‘cuz if they do, they won’t be your customers much longer.

In my most recent post I referenced the (American situation comedy) Seinfeld episode entitled “The Soup Nazi,” premised on a situation of a restaurant that served soup, and was so popular that the staff felt at liberty to treat their customers abruptly, or even contemptuously. Of course, this notion was being advanced for comedic effect, but it’s really not very far removed from reality. The examples are all around us.

Do a Google® search on “ticket lines,” and hundreds of images pop up of masses of people queuing up to wait for access to concerts, movies – heck, there’s even one for a handmade bicycle show! How much “customer relations management” do you suppose these entertainers, movie theater managers, or bicycle suppliers need to employ? If you said “none at all,” go to the head of the class.

Consider the classic quote from Ralph Waldo Emerson: “If a man has good corn or wood, or boards, or pigs, to sell, or can make better chairs or knives, crucibles or church organs, than anybody else, you will find a broad hard-beaten road to his house, though it be in the woods.”[i] Let’s multiply this formula by negative one, shall we? I’m thinking its inverse is something like this: “If  your product is mediocre, or even sub-standard, you could have your shop right off of Main Street, and you’re still going to have problems attracting and retaining customers,” which would seem to fly in the face of the old commercial real estate axiom, that “it’s all about location, location, location.”

Of course, the first step in customer relations management involves price-setting: McDonald’s isn’t out-performing virtually every steak house in existence because it offers better cuisine – it’s out-performing them because it offers better cuisine for the money. But from a project management point of view, price-setting is rarely an option, since our projects tend to be awarded based on a competitive sealed-bid process – it’s not as if, should our projects suddenly begin to perform poorly, we can offer to knock the price down. It’s usually the opposite – when projects go south, the remedy virtually always involves more money.

Which leads us to the question: In the competitive-bid project arena, how does a project manager lay claim to more money from the existing customer for the agreed-to scope? And the indisputable answer is: via the risk management process.

Think about it – when is the risk management function actually invoked? Isn’t it always in one of the following two events?

·         The establishment of a contingency reserve, or

·         Laying claim to additional customer funds, supposedly due to something happening that the project team didn’t foresee.

For the record, just because a contingency reserve is established at the beginning of a project does not alter the fact that it’s a vehicle for accessing funds over and above the project’s original performance measurement baseline (PMB).

Taken in this light, then, the whole risk management industry becomes simply a facade for changing prices in the sealed-bid project arena, and those customers who place great emphasis on the generation of risk analysis exhibits actually end up enabling the practice. It’s the PM equivalent of having your contractor snatch the completion of your project from your grasp, and exclaiming “No scope for you!”

Throughout my management writing career I've developed a reputation for pointing out issues that run contrary to popular opinion. So, when I saw March's theme of customer relations management, I felt I had a duty to not disappoint. The overall theme from my fellow ProjectManagement.com contributors on the topic of customer relations management is, well, how to do it better. So, naturally, I feel compelled to pen a piece on the virtues of doing it worse.

Consider the third graphic in columnist Michael Wood’s article, Rethinking Customer Relationship Management. It depicts scales, with “What Customers Want” being balanced against “What Organizations Want.” Under these categories are the following items:

What Customers Want:

·         Value for Money

·         Predictable, consistent, and positive exchanges

·         Courtesy and responsiveness

·         Hassle-free experiences

·         Reliability

What Organizations Want:

·         Long-term relationships

·         Loyalty (don’t buy from competitors)

·         Frequency of spend

·         Fair profit margins

Based on the amount of verbiage in the comment section, Mr. Wood’s ideas strike his readers as insightful, and I do not mean to imply to the contrary. However, I would depict these scales with the following changes:

What Customers Want: goods/services

What Organizations Want: money

…with any other modifiers being somewhat superfluous.

For example, do “organizations” really want “fair profit margins?” Don’t they really desire confiscatory profit margins? As for customers wanting courtesy and responsiveness – recall the famous Seinfeld episode “The Soup Nazi,” where a carry-out restaurant’s soup was so popular that its employees felt at liberty to, well, abuse its patrons to comic extremes. Of course, when I am out spending my money I like to be treated with courtesy; but the point here is that it may be rather impractical to structure a given business model assuming that some generalized notion of the motives of those involved in economic exchanges can be captured, much less quantified.

Soooo… if an assessment of interior motives won’t serve as a basis for modifying an approach to customer relations management, what will? I’m thinking outward, observable behaviors can be the basis for evaluating and modifying this branch of management. Tackling CRM from this angle quickly leads to Hatfield’s Rule of Customer Relations Management #1: Bad players do not automatically acquire noble or virtuous characteristics upon assuming the role of customer in economic exchanges. In fact, in the retail industry savvy returns managers have learned to identify those customers who are adept at abusing the return process, and will often meet these people’s immediate demands, along with an invitation to not return to that particular establishment. In the time I personally worked in both the food service and retail sectors I observed such outrageous behavior from abusive customers that I found myself wishing to encounter these people outside of my workplace, just to give them their appropriate comeuppance.

This, then, becomes your customer relations mirror: the outward manifestations of your customer base. If your vineyard produces sweet, high-alcohol content wines – the so-called “dessert,” or “fortified” wines – then your clientele is far more likely to consume your product while it is still in the bottle, often wrapped in a paper bag. Should your vineyard, then, include “Predictable, consistent, and positive exchanges” as part of its customer relations management model?

My take: probably not.

I must give credit where it is due: this management generation’s push towards enhancing and managing the organization’s relationship with its customer base was spurred forward – if not out-and-out originated – with the work of Professor Tom Peters, author of many works, In Search of Excellence being perhaps the most widely recognized. Now, if Professor Peters knows about me at all, he probably loathes me, since I’ve penned a couple of pieces that had some fun at his expense. My problem with his writings, though, remains: although he rightly chides management to exert more energy and expertise towards satisfying customer needs, I've never read where he provides a structure that would enable a sense of proportion or perspective on this increased emphasis.  When I summarized Peters’ work as, essentially, “give all of your assets over to anyone who even faintly resembles a customer,” I was, of course, engaging in hyperbole, but not that much, really. I have not seen any attempt from Professor Peters to offer guidance on what should be the upper boundary on such efforts.

What’s needed is a basic structure, a guide that will help the prescient manager approach the issues associated with managing the customer relationship. Allow me to propose this one:

In a perfect marketplace, our customers would pay us for the work we do, and not pay for work we did not do, plain and simple. Ah, but there’s the rub – so much of what happens in the marketplace is far from being that plain or simple. So, what is going on when we venture outside the green boxes? Much, and those things have major implications for the future of your project team or organization.

Let’s tackle the (4) cell first – your organization is receiving revenue for work it did not perform. I freely admit, this is an attractive quadrant – otherwise, how do those lottery jackpots get so big? What were those ancient alchemists trying to do, really? From whence came the capital that built Las Vegas, Atlantic City, and Monte Carlo? Getting something for nothing has such a powerful appeal that entire governments are elected and emplaced based on this notion, so it’s certainly not so far-fetched to assume that at least some taint of it has seeped into many business models. Think about the asset managers’ main axiom, that the point of all management is to “maximize shareholder wealth.” Blind adherence to this so-called rule would pull the macro organization towards which of these quadrants? Of course, it’s never articulated as such – just the opposite. How many organizations’ mission statements include some boilerplate stuff about making sure the customer receives every bit of value that they have coming?

Indeed, the entire warranty, guarantee, return policy, and quality industries are based on the fact that the organization that is even widely perceived to be in the (4) quadrant will be out of business, and soon. So, while the magnetic pull of the (4) quadrant is powerful, it’s generally acknowledged that it is fatal to be caught there.

What of the (1) quadrant? Taken to its extreme, it is slavery, which is highly repugnant to most everybody. Still, isn’t this quadrant consistent with the essence of what Tom Peters is saying, that it’s better to be at least a little bit in this quadrant than in (4), or even in (3)? Consider what your competition is doing – given a chance, virtually every new entrepreneur (or organizations on fire to acquire new customers) dive head-long into quadrant (1), eager to convince the world that they are much more comfortable there than in the lower quadrants. Once these have attained a loyal customer base, the move towards quadrant (2) will occur, but not too soon. Ironically, they want to convince their potential customers that they can get something, if not for (next to) nothing, then more economically than the competition can provide.

Of course, a more sophisticated structure is detailed in my must-have second book, but this basic one will do for now. And, based on this simple structure, I would like to leave my readers with a simple question:

What role do the risk managers have in any of this?

Most people are probably not aware of this, but the United States did not lose a single major engagement during the Viet Nam war. In fact, the Tet Offensive was a major defeat forf the Viet Cong. Why does this matter? It’s a prime example of how a real victory was turned into a virtual defeat. And, if it can happen on an international military scale, it can (and does) certainly happen on a project-by-project basis.

The opposite is also true: actual project disasters can be spun into outcomes that, if not completely acceptable, are at least okay enough so that significant pushes to find the true causal factors and hold accountable those responsible don’t really happen. How else did the Big Dig escape widespread outrage?

So the savvy PM needs to be aware that successfully bringing a project to close on-time, on-budget does not automatically translate to an accurate narrative. It’s axiomatic, but bears repeating: perception trumps reality, every time. So, which organizational pathologies serve to turn the facts on their heads en route to the accepted narratives? I’m thinking that prime among them is nepotism/cronyism.

Any deviation from a pure meritocracy that the macro organization indulges in is poisonous, and it’s rarely a fast-acting poison. When employees are promoted into leadership positions, not because of displayed talent, but due to political or any non-performance-based element, several effects emanate. For example, did your organization just promote someone who wasn’t the best candidate for a managerial position? And does this organization have a Mission Statement that contains verbiage about a commitment to the customer, or some such? Well, this Mission Statement has just been shown to be false. Clearly the decision to promote the not-so-qualified over his or her betters is a slap in the face to “the customer,” indicating a willingness on the part of the ones making such a decision to act on factors other than optimal performance. Enhancing the personal relationship, but damaging the organization, becomes acceptable decision-making.

The waves from this pebble-in-the-pond spread farther. The rank-and-file of the organization – will they not also immediately recognize that the so-called Mission Statement isn't accurate? And, if that communication from the executives is false, what other statements from them can be trusted (particularly and especially the whole business about “our people are our most valuable resource”)?  The new “leaders” – where are they leading to, exactly? Is it the same managerial destination that the more talented but rejected one(s) would have pursued? Again, if hard work and talent are not to be recognized and rewarded, and the macro organization knows this, I really can’t see why any employee would want to expend effort or engage their talents, other than the bare minimum to stay employed. Once the nominal rewards for exemplary behavior are off the table, those behaviors will evaporate, and soon.

I’m really not trying to come across as hopelessly naïve – I know that John Ross had to move in to the executive position in Ewing Oil vacated by J.R.  But Dallas is television drama, and the real-world marketplace tends to reveal stories more consistent with those that led, say, to Microsoft® founders becoming bazillionaires because those around them in the nascent personal computer industry failed to put into positions of authority the most talented people at their disposal. Cronyism isn’t confined to friends – it also extends to those who adopt a corporate narrative at variance with an unfolding reality. The reasons for these variances can be legion – arrogance, ignorance, a desire to replicate past victories or avoid previous defeats. And yet, let just a portion of the narrative of the causes of these previous victories or defeats be at odds from the facts, and the organization may have ingested the slow poison of cronyism.

And as this slow poison of cronyism spreads throughout the organization’s circulatory system, it becomes awfully hard to differentiate virtual failure from the real thing.