Game Theory in Management

Regular members of GTIM Nation know of my disdain for risk management (no initial caps) as currently practiced; however, there is no truth to the rumor that I stated that it is a total and complete waste of time, it only serves to muddy the Management Information System (MIS) waters, or that I have compared its practitioners to members of the genus Mustelidae. I have, though, regularly stated that it fails two of my three criteria for valid management information systems, that they be:

• Accurate,
• Timely, and, perhaps most important of all,
• Relevant.

Being the traditional kind of PM that I am, I think it’s clear that the standard methodologies of Earned Value and Critical Path represent valid systems, while risk management[i] doesn’t. But curmudgeonly blogger talk is cheap: what can we see in legitimate management science space that would convincingly point to the conclusion that risk management[ii] methods are objectively inferior to, say, Earned Value?

To set up this test, let’s first find a common output from each system. Risk management (I only used an initial cap on the word “risk” because it started the sentence) cannot tell you:

• Cost variance,
• Schedule variance,
• Which Control Accounts or Work Packages are doing okay in cost/schedule performance space,
• …and which are in trouble
• …or by how much,

…all of which, the alert reader will realize, are highly relevant pieces of information. Conversely, Earned Value Management Systems cannot tell you:

• Odds of speculated alternatives to the cost baseline actually occurring,
• …or their estimated impact,
• The appropriate amount to set aside for a contingency budget,
• Or the “confidence interval” that the original cost baseline will not be exceeded,

…all of which, the alert reader will realize, are fairly irrelevant, with the possible exception of the third bullet (but even that is highly dependent upon the ability to accurately capture its underlying assumptions’ data, which is itself suspect). So, what relevant piece of information do both types of systems assert an ability to generate?

“I’ll take ‘Variances at Completion’ for $1000, Alex.”

 To be sure, this apparently crucial piece of information doesn’t come by the risk managers[iii] easily. In order to provide an accurate prediction of how much a given project will cost when it is complete, how long it will take, and compare those figures to the original baseline estimates, the following processes and consideration must come into play:

• Assuming that the project’s original scope baseline was used to create its cost and schedule baselines, and that these latter two have a nominal “confidence interval” of 80%, it then follows that the amount of contingency derived from the risk baseline represents a not-to-exceed limit.
• Further assuming that the risk analysis was performed at an appropriate level of the Work Breakdown Structure (WBS) – one would hope for the Work Package level, but Control Account-level is perhaps usable – the odds of each of the alternative scenarios to the one described in the WP are multiplied by the estimated impact (both cost and schedule), and summed at that same WBS level.
• If any of the alternate scenarios occur, the amount of contingency assigned to that alternative is added to the nominal Budget at Completion to derive a new Estimate at Completion (EAC).
• On the other hand, should a task receiving this type of analysis actually finish without a risk event occurring, the amount of contingency associated with that task is “released,” and the EAC remains unchanged.
• If an event that impacts the project’s costs, unexpected by both the PM and the risk managers, occurs, it is classified as an “unknown unknown,”[iv] and its quickly-estimated impacts are added to the previous EAC.

Note that these steps are not scalable. The alternative scenarios either happen, or they do not. At that point, the entirety of their estimated impact is the “right” number, or it is not. The act of multiplying the impact amount by the speculated estimated odds of occurrence only provides useful information in the aggregate. Note also that most of these steps require the time and attention of some fairly proficient analysts.

So, how would an Earned Value system provide this same information?

• Divide the estimated percent complete figure into the cumulative actual costs. The same thing works for duration – divide the percent complete figure into the number of days since the project’s start date.

Note that these steps are perfectly scalable. They will return a figure accurate to within ten points at whatever level of the WBS is being assessed. Note also that it requires no special expertise (to perform – setting up the original baselines do require some level of competence, but would need to be done for the risk managers anyway). A grade schooler could do it.

So, I put it to my readers, both Members of GTIM Nation and occasional: which information stream do you think is superior?

[i] No initial caps.

[ii] Ibid.

[iii] Ibid.

[iv] …which has to be one of the goofiest terms in all of management science.

In the television series Star Trek, The Next Generation (TNG), one of the main characters throughout its run was Lt. Commander Deanna Troi, played by Marina Sirtus. She was half-human, half-Betazoid, a species with telepathic abilities. As “ship’s counselor,” she occupied a chair on the bridge of the Enterprise, right next to Captain Picard, opposite First Officer Riker. With such prominent placement on the bridge of The Federation’s flagship, one would think she had an awful lot to contribute. And one would be mistaken.

Just as the Star Trek, The Original Series’ (TOS) character Commander Spock had the familiar line “most illogical,” or “fascinating,” Lt. Commander Troi is probably best known for her phrase “I sense he’s hiding something, Captain,” usually when such an observation could have easily been made by any of the non-telepathic members of the bridge crew, and almost always when the subject of her remark was obviously obfuscating. To be fair, there were a couple (at least) of episodes where her telepathic abilities provided an insight as to the true motives of that particular episode’s antagonist, but for the most part I found her intuitions to be clearly redundant.

Meanwhile, Back In The Project Management World…

While not telepathic in nature, there can be no doubt that we PM-types have access to information and insights completely foreign to those outside our clan. For example, consider a grand assembly of the principals of a given organization, meeting to ascertain, well, the usual question on everybody’s mind: how are we doing? Of course, each specialty will interpret the question, technique for deriving an answer, and appropriate response very differently, so:

• Our friends, the Accountants, will want to answer the question by providing information from the general ledger, specifically the profit-and-loss statement. If they do foray into project performance space, it will be to project an Estimate at Completion predicated entirely on the rate of spending, by project.
• Our other friends, the risk managers (no initial caps) will turn to the risk register, add up the previous risk events that they had guessed foreseen that actually came about, summarize their collective costs, and compare that to the total time-phased contingency budget across the projects in the organization’s portfolio to see if risk-event-related costs are out-pacing their budgets. In the alternative, they will compute the approval rate of all of the Baseline Change Proposals submitted due to the occurrence of any risk event, on the risk register or not, to gauge the individual projects’ ability to compensate for said events and that are likely to come in on-time, on-budget.

Just kidding. Expect them to assert a judgement on organizational health based entirely on the projects’ willingness to pay them to set up a risk register.

• Our still other friends (GTIM Nation makes a lot of friends, don’t we?), the Communications Managers, will gauge organizational health by performing an assessment of the ability of all “stakeholders” to weigh in on key decisions in project space. They’re always searching for that one overlooked stakeholder who has the answer, but hasn’t been asked nicely to interact with the organization’s principals.
• Expect the Quality Managers (we can’t be their friends, due to their high standards) to proclaim acceptable (or not) organizational performance based on customer perceptions of the organization’s output, regardless of whether or not this output is consistent with the original scope baseline.
• The rogue estimators (make no mistake: if the estimators don’t belong to the PMO, they’ve gone rogue) will appear to come closer to the relevant information for this meeting by re-estimating the work remaining in the projects in the portfolio, adding on the cumulative actual costs, and proclaiming reliable Estimates at Completion. (Narrator: the numbers they generate are not, in reality, reliable.)
• Finally, we have the Project Management-types, who can predict with unmatched accuracy which projects in the portfolio will overrun, underrun, come in late or early, or any combination thereof, and by how much. Even the most basic of Earned Value Management Systems (EVMSs) can do this, and, when combined with Critical Path schedules the information becomes all the more accurate. But, since EVM/CPM systems are germane to we PM-types, none of the other specialties can come even close to the relevance and accuracy provided by these information streams.

Which brings us back to Lt. Commander Troi. If you have the ability to know that the Romulans are getting ready to double-cross you, step up and make that known, and sooner rather than later. Similarly, if you, as a PM-type (and member of GTIM Nation) know, based on your EVMS, which projects are doing okay, and which are failing to disclose probable overruns, step up and point it out, even if your assertions run counter to the other “experts” in the board room. Your cost and schedule performance information is accurate and relevant, theirs isn’t.

Otherwise, all of your PM expertise is analogous to sitting in a bridge chair, not connected to an actual station, and bleating “I sense they’re hiding something, Captain.”

As I wrap up GTIM’s take on COVID-19 Impact, one year later (ProjectManagement.com’s theme for March), I want to put a bow on the whole what-happened-and-how-do-we-move-on business, from a Project Management perspective (of course). A lot of how we get made whole on the project side of things is going to depend on what kind of contract your Team is working, and which kind of customer. As they (should) teach in risk management (no initial caps) school, the primary vehicle for managing your project’s risk is the contract vehicle itself. If you’re working a firm fixed price (FFP) contract, then your organization has signed on to accept all of the risk for the project, global pandemics (virtually always) included. If, on the other hand, your customer has signed on to a cost-plus contract (e.g., cost plus fixed fee [CPFF], cost plus award fee [CPAF]), then they have committed to sharing some of the risks involved in the project, and your job is now to articulate the best possible case for them to accept as much of that risk as possible. Add to this the PM’s ability to read their customers, and this is where things get tricky.

Just to be clear, nothing in this column should be taken as legal advice when making a force majeure claim. Those questions are best left to the contract administrators and lawyers, and I am neither. This blog is entirely from a Project Management point of view, and my own personal perspective at that. But it seems to me that PMs who have seen a sizable impact from COVID-19, and are working some form of cost-plus contract, could help themselves – and their Teams – by reading their customers’ mood or disposition as they advance their Baseline Change Requests (BCRs).

First off, was your Project’s performance harmed by the pandemic? A simple drop in Cost Performance or Schedule Performance Index (CPI/SPI) can’t be interpreted as ipso facto evidence of COVID-related damages. As I mentioned in an earlier blog, we’re looking at a series of potential scenarios, both with respect to changes in the performance indicators and the condition of the Project both prior to and after the lockdowns became prevalent.

The preliminary analysis has to do with the CPI and SPI behavior. Generally speaking,

• If both CPI and SPI are over 1.00, you are in great shape.
• If CPI is below 1.00, but SPI is over, that simply means you’re accomplishing the Project’s scope faster than originally baselined. If this is perceived as undesirable, simply tap the brakes.
• If SPI is below 1.00, but CPI is over, get on the gas. What you’re doing, you’re doing efficiently – you’re just not doing enough of it.
• Finally, if both CPI and SPI are below 1.00, you are in trouble.

Pretty basic, right? So now let’s overlay this onto the performance figures your Project has seen since February 2020 (the last “normal” month for most of us) and the present. This behavior can be binned, so:

If you do decide to generate a BCR under these scenarios, here’s what you can expect:

Of course, if your customer routinely engages in the actions listed in the Response column for Scenario 6, you won’t be able to glean any additional information on the status of your request for baseline adjustment. But, if that is the case, you probably have a lot of other problems anyway.

GTIM Nation regulars know my respect and admiration for Michael Maccoby, particularly his book The Gamesman; The New Corporate Leaders (Simon & Schuster, 1977). In this book Dr. Maccoby lays out four basic archetypes we can generally expect to encounter in the business world:

• The Company Man tends to assume the persona of the corporate culture around him,
• The Craftsman doesn’t really care about for whom he works, but is keenly interested in the quality of his output,
• The Jungle Fighter engages in cloak-and-dagger techniques to advance his career, and very well may present as being technically advanced, but really isn’t, and…
• The Gamesman sees his business environment as something of a game. For this reason he is simultaneously more technically advanced than most, but is also more willing to take risks.

In previous blogs I’ve analyzed not just the implications of encountering these archetypes in the daily interactions of Project Team members, but what the results can be if the entire Project Team – or even macro-organization – were to become dominated by each type. I have personally encountered groups with organizational cultures that mirrored the Maccoby archetypes, and I can state confidently that it’s far better to be led by Gamesmen and Craftsmen than Company Men, or (shudder) Jungle Fighters. In my experience,

• Craftsmen want the job done right, and, if you can demonstrate an ability and willingness to help them achieve that goal, you will fit right in this Project Team. Not only that, but once you arrive and start looking around, you will soon come to the realization that the people around you are pretty talented.
• Dr. Maccoby asserts that Gamesmen are destined to be the most successful archetype, since they’re all about winning, and I agree.

Conversely,

• In those instances where Company Men assume a leadership position, they will invariably employ any and all familiar organizational business model templates to address any problem, no matter how novel. Risk-taking or employing innovative solutions is simply not how these people operate, and the consequences are always organizationally unhealthy, even if they take a long time to unfold.
• Jungle Fighters are the worst. They’ll spend more time trying to build and maintain a façade of expertise than actually exercising actual skill. If these people assume a leadership role, they will create a highly toxic culture, where any challenge to their selected technical approach to the projects’ scope will be portrayed as some kind of personal attack, in dire need of retaliation.

Okay, So What Does All This Have To Do With COVID?

I’m glad you asked. In last week’s blog I discussed how the pandemic has had such a negative, often tragic, and broad-based impact on the macro economy. Going on one year after the first widespread shutdowns began, the cost and schedule performance of the projects making up virtually everybody’s portfolios are available, and some critical organizational behavior and performance information can be gleaned from them.

Let me state plainly that a whole lot of projects were negatively impacted by the pandemic, and even the very best PMs would have been hard-pressed to reduce the severity of such impacts, even by a little. That having been established, there are also portfolios made up of projects with roughly similar scope, but widely divergent outcomes. I’ll approach this using the Game Theorists’ favorite tool, the payoff grid:

The short statements in the payoff grid for Scenarios 1 (A) and 1 (B) are self-explanatory, so let’s look at Scenario 2(A). In the face of failure, Jungle Fighters and Company Men will look to blame something or somebody, but never their own inability to either set the optimal technical agenda, or to properly lead a team of professionals, even in a dramatically changed project environment. If COVID impact offers the most plausible causal element of their troubles, they will reflexively blame it, perhaps not reading my blog from two weeks ago showing how Earned Value Management Systems can be used to pinpoint which projects were genuinely affected by the pandemic, and by how much. By contrast, if the poorly-performing projects were headed by a Craftsman or Gamesman, these PMs will usually try to precisely quantify the effect instead of seeing it as some kind of poor performance license.

I believe that, in the final analysis, Project Teams led by Craftsmen or Gamesmen will show themselves to be more robust in the event of a broadly-negative macro-economic event, while Project Teams “led” by the other Maccoby archetypes will see their vulnerabilities exposed. Now that you know what to look for, seek the former, avoid the latter.

Good luck.

Here in March 2021, the one-year anniversary of the imposition of pandemic-avoiding regulations, it’s somewhat natural to reflect back on what we’ve experienced and what we’ve learned during this time. In any discussion of the management sciences, though, the question of what we’ve learned from any given history must come with the acknowledgement that we’re never dealing with a purely experimental setting. There are simply too many parameters involved whenever we attempt to draw a usable inference of the causal elements that went into any particular management strategy.

The Covid-19 pandemic, however, represented a large-scale, broad-based condition on the macro economy. In other words, as negative as it was and is, it had some level of impact on virtually everybody, and on the way everybody conducted business. Along the way the past year has shown some rather obvious problems with several previously-widely accepted theories, such as the ones I addressed in last week’s blog, but it has also shown a light on some management strategies that were perhaps given short-shrift prior to 2020. For example, once the restrictions on business began to loosen, what were those business’ main concern? Were they associated with “maximizing shareholder wealth,” or were they oriented towards getting their customers back? And, before anybody tries to assert that the former encompasses the latter, let me be more specific: in the various stages of businesses being allowed to re-open, did anybody really care about the return-on-investment figures for purchasing or leasing the new copier?

While the Asset Managers’ (read: accountants’) main concern is, well, the performance of the organizations’ assets, the ability to deliver for customers belongs to the PM world. None of the information streams that inform management of the organization’s progress towards accomplishing the customers’ expectations for achieving scope, cost, or schedule performance can be relayed via the general ledger (and don’t get me started on the output from risk management [no initial caps] “analysis”). That’s simply a fact. The only reason that the belief that a project can be successfully managed without those pesky PM artifacts like the Work Breakdown Structure or Earned Value Management System advances is that projects that never had anything go wrong with them on occasion relied exclusively on the general ledger to inform their decisions, so it follows (erroneously) that all successful projects don’t need those things.

But what happens when something does go wrong with the project? As I pointed out in the previous paragraph, what’s needed is a Management Information System (MIS) that can answer a whole bunch of questions, and the general ledger isn’t that system. What questions? Well, ones like:

• Is the project really performing poorly (I mean, past my vague feeling)?
• If so, is its performance lacking in cost, schedule, or both?
• How big is the problem?
• Where, specifically, is the problem? What part of the project is experiencing it?
• What are the implications long-term? In other words, what is going to happen if the problem isn’t addressed, or isn’t addressed fully or appropriately?
• What’s causing this problem?

While the general ledger can only marginally or tangentially answer any of these questions, an Earned Value Management System, based on a valid WBS, can answer all of them, with excellent precision. Throw in a Critical Path Methodology capability, and the resulting information stream becomes all the more powerful. Allow me to point out again that such information streams only become vital when something goes wrong. A perfectly healthy patient does not need an X-ray, and could probably spend his whole life not knowing which nearby medical facilities have a machine capable of performing such imaging without issue. That all changes real fast if such a person breaks an arm.

This all has the effect of placing much of the motivation for initiating and maintaining Project Management Information Systems in an organization to those analogous to purchasing insurance. If someone is supremely confident that they will never get sick or break an arm, they may tell themselves that it’s a waste of money to buy insurance. Similarly, if a (so-called) PM is confident that they “manage” so well that they don’t really need a performance measurement system to inform their decisions, they may forgo the cost of setting up such a system. All of which brings us back to the title of this blog, the famous PM saying that the reason project teams detest performance measurement systems is that they vividly show their lack of performance.

Even if the downturn in performance was caused by a global pandemic.