Game Theory in Management

When we last left our hero … wait. If you didn’t read Part I, just scroll down to catch up.

“Do tell” Piem began, icily, “how you define strategic alignment, and intend to find the killer.”

“Alright” I began, “but first, I need to talk to one person, and that person’s identity is whoever administers the database that keeps track of this company’s proposals.”

Piem O’Dagger and Tut Tutworth stared incredulously, as did most of the others assembled in the Stratmon Mansion’s library.

“What’s Anna Goodall got to do with this?” asked Tutworth.

A smallish, ordinary-looking woman stood up from the couch, and shyly asked “How can I help?”

“Anna, do you enter the data into and issue reports from the proposal tracking system?”

“Yes.”

At this point Piem had had quite enough.

“Ivan, why on Earth did you bring in this idiot?” she stormed. “Part of my PMO duties includes operating the real portfolio management software – the vendor told us it’s the most widely-used one throughout industry – which means I should be the one answering these questions!”

“Yeah, well…” I began, “just ‘cuz my cat has kittens in the oven doesn’t make them biscuits.”

“What?!” asked everyone in the room, simultaneously.

Ivan interjected. “Piem, Stanly Raspberry is the preeminent consulting detective in matters managerial. I urge you to cooperate with him and this investigation.”

“You’re right, I’m sorry.” Piem replied. “It’s just that there’s some lazy project manager from the UK who’s trying to take my name, and it’s got me stressed.”

“Anna” I continued, “does your system have the capability of sorting the existing proposal backlog by customer and by type of industry?”

“Of course” she answered, as she flipped open her laptop.

“Did Mr. Stratmon recently propose work in an area where this company hadn’t had a presence previously?”

“Yes, here it is” Anna replied. “He prepared five new proposals in the past two weeks, in the artificial intelligence industry.”

“We don’t do AI here” Tutworth sniffed. “Ask her how much money the proposals were worth.”

“One point five million, all together.”

“That’s what I’m talking about, Raspberry” Tutworth continued. “That’s a pittance, compared to the rest of the proposal backlog, not to mention the contract backlog.”

“Companies that reflexively respond to large dollar figure Requests for Proposal in new markets aren’t serious. The serious strategic manager will seek out the smaller, easier contracts in order to have a better chance of performing well, and then use those successful projects as a springboard to the larger efforts. In other words, Stratmon was willing to sacrifice some shareholder wealth in order to take a patient approach to advancing his strategy.”

Tutworth became furious. “As everybody knows, the point of all management is to maximize shareholder wealth! Mr. Stratmon would never abandon that principle!”

“Yeah, whatever. Anna, have all five proposals gone out?”

“No, there’s one left to send. Mr. Stratmon was putting the finishing touches on it, when …”

“When is it due?”

“Tomorrow.”

“Ivan, I saw some reporters outside the main gate when we pulled in. Would you let one of them in?”

“Okay. Why?”

“Trust me.”

Minutes later a rather disheveled fellow was shown into the library. Despite his substandard attire and grooming, he had an arrogance about him, as if he was the smartest person in any room he entered.

“Journalism major?”

“Risk manager.”

“I have a statement about the incident that occurred here this evening. Mr. Stratmon was discovered near death, but managed to leave the room before collapsing. He was found, is recovering, and hopes to finish a bit of important work tomorrow before convalescing abroad.”

“Okay, thanks.”

“When will that run?”

“Tomorrow morning” the reporter replied, as he left the room.

The library erupted in angry accusations. Ivan finally settled them down, and asked “Raspberry, what do you hope to accomplish? Stratmon is dead, and it’s only a matter of time before everybody knows it.”

“Everybody except the killer, and I only need one day to keep him in the dark. I suggest everybody finish your brandies, and go to bed. Come to work tomorrow as if everything’s normal. Ivan, I need a word with you.”

As Stratmon’s family, friends, and business associates filed out, I cornered Ivan.

“You’re setting a trap, aren’t you?” Ivan asked.

“Yeah, I am” I replied. “I have a hunch that, by close of business tomorrow, coming back to finish the job will be…”

Wow! Look at that! Out of space again! Tune in to this channel next week, for the Conclusion of Crimes of Strategic Passion.

It was another dark and stormy night. I was sitting at my desk, looking at my name stenciled across the frosted glass-paned door, yrrebpsaR ylnatS, eyE etavirP, when the phone rang.

“Raspberry? Is this you?”

I immediately recognized the voice as Ivan Gettim, probably the only detective on the force who would voluntarily interact with me.

“Yeah, it’s me, Ivan. What’s up?”

“Get out here to the Stratmon Mansion – it’s way out here by Riverside, and the local police don’t know how to even approach a homicide.”

“There’s been a homicide?”

“Yeah, old man Stratmon himself. Just get out here.”

By the time I arrived at the Stratmon Mansion, Ivan had assembled Stratmon’s family, friends, and members of his giant corporation’s Board in the spacious library.

“Raspberry! Glad you’re here. The tape outline there shows where the body was found. There are no signs of a forced entry, and none of the witnesses heard or saw anything unusual.”

“How did he die?”

“We don’t know that yet, either. There were no marks on his body, and the initial toxicology scan has ruled out poison. But he did have a pen in his hand, and nearby, on his desk, he wrote ‘strategic mgmt.’ Why do you suppose he wrote that, rather than his killer’s name?”

“Probably because he didn’t know his killer’s name, but did know the likely motive. It does suggest, though, that the people in this room are innocent – otherwise, he would have named one of them.”

A short, thin fellow with round wire-rimmed eyeglasses and wearing suspenders and a bow tie spoke up.

“I don’t know who killed him, but I do know how you can find who did.”

“This is Tut Tutworth, the head of accounting” Ivan explained.

“Lay it on me.”

“According to our last profit-and-loss statement, old man Stratmon recently had a large windfall hit the general ledger, from selling some assets he had originally acquired at bargain-basement prices.”

“Yeah. So?”

“Sooo…” Tut started, clearly annoyed, “just find the previous owner of that set of assets, and you have your killer.”

Ivan and I exchanged confused glances.

“Why? Was the previous owner somehow coerced into selling to Stratmon?”

“Not as far as I know, but he had to be furious. Wouldn’t you be?”

Confused glances all around.

“I may not know exactly where to start looking, but I think I have a clue” stated the pretty woman sitting next to Tutworth.

“And you are…?”

“Piem O’Dagger, the head of the Project Management Office.”

“What’s your clue?”

“I managed Stratmon’s entire project and program portfolio, and there was only one client whose projects were consistently plagued with cost and schedule performance problems.”

“Yeah. So?”

“Just find out who the client’s PM counterpart is, and you have your killer!”

More confused looks all the way around.

“Are you saying that this customer would resort to killing his contractor’s owner rather than seek other remedies? Who is this client, anyway?”

“An industrial laundry and chicken-themed restaurant chain in Albuquerque, New Mexico.”

Knowing glances all around.

“Still, that’s more than a little drastic. We’ve heard from the asset manager, and the project management office director – is there anybody here from the strategic management sector?”

More confused glances all around.

“I’m the head of finance and accounting, and Piem here is the director of the project management office – you can’t get any more strategic than that!” Tutworth stormed.

“You guys don’t get it, do you?” I stated. “Strategic management, or alignment, isn’t just doing asset management or program/project management at a high level, or on large portfolios.”

“Do tell” Piem began, icily, “how you define strategic alignment, and intend to find the killer.”

“Alright. But first, I need to talk to one person, and that person’s identity is…”

…going to have to wait for next week, since I’m out of space! In Part 2, we’ll have a working definition of strategic alignment, how the other types of management properly interact with it, and, just maybe, the identity of the killer.

From the Contradictory Proverbs[i] web page, a few examples:

a)      Look before you leap.

b)      He who hesitates is lost.

a)      You’re never too old to learn.

b)      You can’t teach an old dog new tricks.

a)      Winners never quit.

b)      Quit while you’re ahead.

The web page’s list goes on and on, but you get the idea. So, who thinks that it’s at least possible that some of the management science theories that have been propagated and largely accepted over the past millennium are also only conditionally true, or even blatantly contradictory? Consider:

a)      Shareholder wealth is the appropriate goal of a business firm in a capitalist society.[ii]

b)      Make a customer, not a sale.[iii]

a)      The purpose of risk management is to identify potential problems before they occur so that risk-handling activities may be planned and invoked as needed across the life of the product or project to mitigate adverse impacts on achieving objectives.[iv]

b)      It is in the admission of ignorance and the admission of uncertainty that there is a hope for the continuous motion of human beings in some direction that doesn't get confined, permanently blocked, as it has so many times before in various periods in the history of man.[v]

In pursuing ProjectManagement.com’s theme for June, that of Strategic Alignment, by reviewing the current literature on the topic, there is, well, some silliness to wade through – so let’s get to it.

We’ll start with the most notorious category of management science that claims to produce critical information on an organization’s strategy selection but, in fact, is wholly inadequate for the role. That’s right, I’m talking about our friends, the accountants. The first set of contradictory proverbs in the second set illustrates pithily the difference in approach taken by the Asset Managers and Project Managers. Asset Management is largely predicated on the “maximize shareholder wealth” meme, as I have pointed out a few times in this blog. Conversely, Project Management is all about delivering the customers’ expected scope, within the customers’ time frame and budget.

While this means that PM theory is significantly closer to applicability in the Strategic Management world, the last pair of juxtaposed quotes represents a hint that we’re not quite there, either. Risk Management is big business, and considered in many quarters to be a key component of Project Management. But even if we PM-types concede the argument that some aspects of the project’s unfolding future can be captured and prepared for, there is no Gaussian-curve based technique that can possibly predict the behavior of the organization’s competitors, and performance against competitors is what Strategic Management is all about.

Soooo… with what, exactly, are we aligning our strategy? With popular but ultimately unsound, or even contradictory theories? Sadly, discussions of Strategic Management often devolve to such misalignment. In this month’s series, I hope to skewer some of these overreaching theories.

I want to lead my readers on a little thought exercise. Imagine being a member of the Star Trek  alien race Vulcan. Vulcans are logical and intelligent, usually above human norms. Now imagine visiting Earth on February 2^nd of a given year in the 23^rd Century, in a town in central-Western Pennsylvania, where you see a large group of humans – some attired rather formally – gathering around a burrow of a large rodent, to observe whether or not it will “see its shadow.” Several near-logical things pop to mind:

·         Since we cannot know what the Marmota Momax perceives with respect to its shadow, the first line of inquiry should be to determine if the groundhog in question has a concept of casting a shadow.

·         That the humans, apparently, have not conducted such an investigation, the question now seems to turn on whether or not the groundhog casts a shadow, the assumption that, if it does, it will see it.

·         And change the weather.

·         Wait, that’s a leap. We’ll leave unchallenged (for now) the assumption that groundhogs are aware of their shadows, and those circumstances where such shadows are cast.

·         In other words, whether or not it is sunny.

·         So, if the line of inquiry now is to ascertain whether or not it is sunny, why are the humans pulling the rodent from the burrow? Can they not simply look up into the sky?

·         Additional lines of experimentation:

o   Move the rodent away from Pennsylvania, to see if it is specifically the groundhog’s shadow that portends weather patterns, or simply the fact that it happens to be in that locale.

o   If the former, many rodents from many locales should be pulled from their burrows on this date.

o   Alternately, the humans from those locales could simply look up to see if they can see the sun, and leave the rodentia alone.

…and so on.

In short, the whole concept is profoundly illogical.

So, where did it come from?

Lots of speculation on this. Most of it centers on the Northern European customs from farming communities. You see, misjudging the timing of Spring Planting could easily mean the difference between affluence and poverty, or even life and death. Assuming that the forest animals had some kind of instinctive knowledge of when the last freeze would occur, the farmers would study some of them closely, to tease out clues that could be used to ascertain the exactly appropriate day for planting. By degrees, we get the happenings at Punxsutawney.

The point? Things change, and they do so in such ways as to preclude reasonable forecasting (one estimate of Punxsutawney Phil’s accuracy rate sets it at a dismal 39%). Recall the old axiom, that which is measured gets managed. Well, here’s Hatfield’s addendum to that: the future cannot be quantified, therefore, it cannot be managed. How the unfolding future impacts a given project’s scope, cost, and schedule baseline can be managed, but this is a very different animal (get it?) from actually managing change.While “change” really cannot be managed, performance can; however, real performance management hinges on accurate performance measurement systems, which, in turn, depend on non-rubber baselines to function. 

So, there you have it: if the information you are gleaning from your de-burrowed rodent doesn’t change project performance, you’re not doing change management.

One of the things that strike me as exceedingly weird about the way Change Control is currently practiced has to do with the establishment and use of a project’s Contingency Budget, or reserve. This is the amount that is “set aside” for “risk events,” and is tapped whenever said “risk events” take place. Already tired of my using quotation marks to signal the phrase “so-called”? I’m just getting warmed up.

So, how do these Contingency Budgets come into being in the first place? Well, they’re typically created after a thorough risk analysis has been performed on the cost, schedule, and scope baselines, including in-depth use of Monte Carlo and Decision-Tree Analysis techniques, and calculated to an 80% confidence interval through expert usage of the rules of probability. In other words, they’re pulled out of thin air, anywhere between a 5 to 15% flat rate.

As the project gets underway, the next phase of decision-making in the Change Control arena has to do with what “unexpected” things happen as the scope is pursued. In order to maintain discipline in the process used to change the cost, scope, or schedule baselines, a standard rule is that you can’t change one of these baselines without changing the other two. So, when a Baseline Change Proposal is issued to do just that, highly-trained experts will describe in detail what ought to be altered in the scope baseline first, and its ramifications for cost and schedule. This complete and even-handed assessment then goes to a Baseline Change Control Board, or BCCB, where its particulars are scrutinized prior to approval and implementation. In short, millions of dollars are removed from the contingency reserve based on hastily-assembled verbiage that contains syntax errors that would flunk a 7^th grade essay, in order to re-align the cost baseline, coincidently enough, to the exact amount of the cumulative negative cost variance, and everybody’s supposed to be okay with that.

As the Contingency Budget nears its exhaustion point, the BCPs being placed before the BCCB undergo higher levels of scrutiny, particularly in those instances where the cumulative percent complete for the project is below half-way. Here is where the risk managers (finally!) begin to earn their pay, since, if the “event” that is driving the “request” happened to be included in the initial risk analysis, some claim of “I told you customers that this might happen!” suddenly becomes the legitimate basis for increasing the project’s overall budget. After carefully considering the original risk analysis, and taking into account several project management axioms such as “things change,” the BCP is approved, and the Contingency Budget moves ever closer to extinction, even as the cumulative cost variance is, once again, reset to zero.

Once the project nears completion, and the Contingency Budget is all but gone, “changes” are harder to “manage.” Should a meteor strike the project site, Godzilla himself wreck catastrophe, or a key supplier’s rates suddenly escalate (all equal events, save that one is perfectly predictable), the onus now falls on the previously-confident customer, who is placed in a most unfortunate position: pony up more funds, or see the project stall in-place, with nothing to show for it. Any attempt from the customer to pinpoint what should have taken place in baseline change space previously is pretty much futile (well, maybe not for the first two instances, but stay with me), since any forensic analysis – say, that the contractor shouldn’t have chewed up the Contingency Budget already on suspect grounds – almost always points to the customer being asleep at the BCCB switch.

So, going all the way back to the initial stages of the project, the question simply must be asked: for all of the baseline development, risk analysis, and baseline change negotiations that have taken place, wouldn’t a straight-up answer to the question in the title have saved a lot of money, time, and energy?