Game Theory in Management

In 1415, King Henry V of England was leading an army through France, attempting to reclaim the territory he believed was rightfully his, being the descendant of William of Normandy, later William the Conqueror. Henry was confronted by a much larger French army near the village of Agincourt and, on the 25^th of October, the two armies came to battle.

When an army, in this case the French, confronts a significantly smaller force, the usual path to victory is to simply envelope the smaller force, forcing them to fight in every direction with no path to retreat. However, this tactic was denied the French, since the battlefield was in a long narrow field bounded on either side by thick forest. But even this did not seem problematic to them – they could simply throw more cavalry and infantry against the English front lines and overwhelm them that way. Unfortunately, the evening before saw torrential rains on the recently-plowed field. It was a sodden, muddy mess.

The typical man-at-arms of the period wore around 80 pounds of armor, either plate or chain-mail, and mounted knights wore far more. As the French advanced the approximately 300 yards, they became exhausted from trying to move forward in the muck. As soon as they came within range of the English longbowmen, they had to endure hundreds of iron-tipped arrows which could easily punch through most of their armor. By the time the remnants arrived at the front of the English lines they were easy marks for Henry’s men-at-arms who, wielding axes and maces, easily dispatched the exhausted French. One account maintains that a 5-foot-high wall of wounded, dead, and struggling Frenchmen lay just in front of the English position. By the end of the day Henry had won an astonishing victory.

Okay, Michael, you say, what does all of this have to do with the reason I clicked on this article, after having seen the title? What does this have to do with the Chief Financial Officer having a corner office, while the PMO personnel are lucky to not have to share cubicles? Well, I’ll tell you.

Back when the precepts of modern project management theory and practice were being codified, the United States Department of Defense was getting a little tired of major programs’ overruns and delays. They created the Cost/Schedule Control System Criterion, or C/SCSC. These guidelines for setting up baselines and generating cost and schedule performance reports were somewhat stringent; but, most of all, they were required of all contractors who wanted to do significant business with the DoD. You don’t want to “do” C/SCSC? Okay, fine, we’ll just take our mega contracts to your competitors, case closed. Generally speaking, this is no longer the case, what with the advances of the so-called graded approach and all. But at this time, “doing” PM was a rock-hard, inescapable requirement for doing business, much like observing Generally Accepted Accounting Practices is now.

The august managers who head up many of the PMOs currently cut their teeth on project management information systems and techniques during this period. It never occurred to them that parts of the macro organization would either silent veto attempts to advance a project management capability, or even resist them outright, until they found themselves in charge of the PMO and saw that exact reality unfold. For many, the fallback position was to engage in eat-your-peas style hectoring, which worked about as well as you would think. Some would resort to near-begging, with little better results. Project managers who did not want to have to engage proper PM techniques no longer had to, and those who wanted things to be different became very unpopular. Like the French at Agincourt, a major condition of the conflict had changed, and changed utterly. The ensuing reverses in applied PM tools and techniques has led directly to the type of management science caste system we see now, where accountants are somehow held to be far more valuable than Earned Value or Critical Path analysts, even though (as I have complained extensively in this blog) the general ledger can’t provide near the amount or quality of management information needed for an organization’s decision-makers that they claim. No, the answer to all of this, interestingly enough, comes from game theory, and is…

Oops! Out of space again. I will address the most appropriate technical approach to advancing the PMO’s mission in my next blog, assuming no accountants equipped with longbows get to me first.

Identifying and articulating the most appropriate role of the Project Management Office has proven to be difficult in the extreme, and the pursuit of this goal has become epistemologically messy, also in the extreme. The practitioners and teachers of project management feel strongly, passionately about their profession, and, in my experience, experience much frustration from the fact that the loudest voices in the management sciences often give short shrift to PM’s advantages and, by extension, the practitioners’ professional worth. This has led to many project management theories being marketed far beyond their capacity for returning relevant information or economic behaviors which, in turn, provide fuel for those opposed to doing project management right, when they correctly point out the overreach. The risk management types represent a classic example of this taking of an invalid theory and advancing it to its absurd lengths, and thereby making the rest of us look like doofuses.

Of course, should the most appropriate role of the PMO actually be captured and articulated, it follows that it could be quantified, and that would represent the brass ring of PM. No more eat-your-peas-style hectoring to get your PMO funded, no siree! The erstwhile PMO directors could present irrefutable analysis that demonstrated to even the most suspender-clad asset manager (read: accountant) that a stubborn refusal to pursue excellence in project management has directly traceable and cataclysmic consequences, to the tune of X dollars per year. As long as the PMO’s budget is less than X, the massive conflict that has afflicted project management types from the beginning of the PM struggle would simply evaporate, having been settled in our favor. Within management science, and by extension the macro-organization, peace would reign at last, and we could get up off of our knees and cease our begging for monthly status. Project management nirvana!

Unfortunately, the Project Management Institute® attempted such a quantification with a slew of books that tried to provide the framework for an organization to compute its PMO’s – wait for it! – Return on Investment. I kid you not. In trying to justify what is, in essence, their raison de etre’, they actually reached back to the accountants’ bag of tricks in order to produce a hard number that would validate the PMO’s creation and support.  Sadly, even when used on an asset (rather than a capability), the formula for computing an ROI is so fraught with either poorly quantified or even unknowable parameters that its returned value is next to meaningless. And yet, the accountants love it, and even PMI® was led to resorting to its use. Amazing.

No, the only way – and I do mean only way – to capture the PMO’s role in the macro organization, as well as in management science in general, is to realize that project and asset management are not variations within the same management science meme. They are different utterly: they pursue different goals, with different tools. As I have often taken them to task in this space previously, the asset managers seek to maximize shareholder wealth. So taken are they with this little axiom that they have convinced themselves that any disagreement with it represents profound backwardness in the management sciences. Nevermind that the Tom Peters of this world mock them to their faces over the over-acceptance of their goal – they will never abandon it. Then along comes the project managers, who dare to say that the pursuit of the customers’ goals with respect to scope, cost, and schedule ought to at least have a place at the decision-makers table, and the asset managers have a collective conniption fit. But it is undeniably true that PM should have a role in providing the decision-makers’ information stream, even as the asset managers see their influence wane.

As I discuss in my must-have second book, Game Theory in Management, there is a third element that must come into play: strategic management. Asset, project, and strategic management represent the triad of management science groupings that provide the only known structure for assessing the benefit of establishing the information streams that can even allow an evaluation of the PMO’s value and role. The organization that is informed of its position relative to its assets, customers, and competition performance is in a place to provide its decision-makers with the information they need to make the correct choices. And the organization that makes the better choices will overcome its competitors every time.

Without a feed from each of the three management science types, the decision-makers are just shooting in the dark. And probably missing.

Two weeks ago I blogged about the PMO’s natural enemies, and last week I wrote about its natural allies. Now I would like to discuss that odd duck, the PMO double-agents. Of course, in the world of espionage (or, at least, in the theatrical world of espionage) a double-agent is a spy who is ostensibly working for one side, but is actually working for the other. The true nature of the movie double-agents’ loyalties can make such movies’ plots very complex (Where Eagles Dare, I Spy, etc.).  Just imagine what they can do to the technical agenda of the Project Management Office.

“Now hold on, Michael!” you say. “How can a member of my PMO staff be surreptitiously working against my organization? For whom would they be doing this?” Well, I’ll tell you, and it has to do with the dual nature of critical path and earned value management information streams.

CPM and EVM information streams serve two purposes: they indicate how the projects are performing in cost and schedule space, and they provide the data points that support the narrative of how and why the things that happened to the projects happened the way they did.  The first purpose is rather easily attained, using the basic calculations I showed in my blog two weeks ago. The second is a bit trickier. For example, recall from my previous blog how you can get within 10% of an estimate at completion by simply dividing the cumulative actual costs by the estimated percent complete, and this simple trick also works for duration.  Clearly, this takes very little set-up, or even very much expertise, save the estimate of the percent complete. Compare this piece of first-purpose information with the amount of data needed to do a complete forensic analysis of a schedule should a subcontractor fail to perform to the contract specifications.  Their natural defense is to claim that your PMO allowed (or even initiated) scope creep, or gave informal directions for additional work to be performed. At an instant, if you had a poorly set-up work breakdown structure (WBS), or the verbiage in your work packages was anything but complete and detailed, your second-purpose PM information stream has just failed utterly.

To prevent this type of failure there has arisen within the ranks of PMO experts this narrative that, unless your scope baseline is exhaustively thorough, your cost estimate detailed in the extreme, your schedule virtually free of level-of-effort tasks or high levels of float, that the entire system is not just sub-par, it is worthless. The people within your PMO who hold to this narrative – they are the double-agents, and, wittingly or not, they can do great damage to the odds that your technical agenda will be met.

Here’s how it works: the unenlightened members of your organization (outside of your PMO) view what you do with a substantial amount of skepticism.  They think that all of the time, energy, and money spent on detailed baselines and their attendant artifacts are a waste, because they fail to generate the first-purpose information they crave. The baseline documents tend to simply occupy shelf space (like the PMBOK Guide®) unless and until some sort of forensic need arises. In order to sell these people that what your PMO brings to the table is (a) extremely valuable, and (b) well worth the price, you are going to have to stress the relevance, inexpensiveness, and accuracy of the cost-and-performance information stream. Those in your own organization who want to dig in their heels and insist that, without the expensive and (largely) irrelevant extremely detailed baseline documents, the whole thing is a waste are actually helping your opponents, who are only too happy to advance the narrative that your PMO does not deliver an information stream that’s worth the (now considerable) investment.

Consultants can be the worst about this, for, if the information stream that the macro organization craves isn’t really that difficult to set up and deliver, then it does not require any advanced or unique knowledge. Of course these will push the idea that properly-functioning PM information systems need advanced or unique knowledge – otherwise, there’s no reason to hire consultants! Hence the “80% confidence interval” silliness, where the risk management types try to horn in on the you-must-spend-megabucks-or-your-systems-are-worthless tripe.

And here you thought the risk management consultants and baseline integrity purists were working for your side!

Last week I wrote of the PMO’s natural enemies, the accountants (and other asset management-minded ones), and project management theory hucksters, who outrageously over-sell their particular discipline’s or techniques’ capabilities. The Project Management Office has other natural enemies, of course, but these two are prime. Fortunately, the PMO also has natural friends within the organization, and they are, paradoxically enough, enlightenment and fear.

Enlightenment is one of the best natural friends of the PMO. As I have mentioned previously in this blog, the worst 20% of managers who are in command of 80% of the information they need to obviate any given decision will out-perform the top 80^th percentile managers who have access to only 20% of the information they need to make a completely informed decision. The enlightened executive who is aware of this will make every effort to make accurate, timely, and, most of all, relevant information available to his managers and project team(s), and two indispensable information streams – how your projects and performing in cost and schedule performance space – typically come exclusively from the PMO. Oh, the accountants or others may try to make the case that this information can come from the general ledger, or from some sort of issues tracking database, or something, but that’s all hooey. Schedule performance comes from a properly set-up critical path method-capable system, almost exclusively. I say almost because a properly set-up earned value management system can also provide accurate schedule performance information, but the EVMS’ primary role is to provide project cost performance information. Without these two systems, however basic or elegantly implemented, there is simply no way of accurately knowing how your projects are performing, or where they are likely to end up.

This last is key. Where are the projects in your portfolio likely to end up? Some years ago the director of a rather large organization asked his mid-level and above managers to send him an e-mail that described their main worry. What’s keeping you up at night? The largest set of responses were derivatives of the concern that they were sitting atop a project disaster, and no one on their project team would tell them about it until it was too late to avoid massive overruns or delays. This fear of being caught flat-footed when project disaster looms, all the while knowing that if they had just been informed of the issue when it was younger it could have been dealt with, is a natural ally of the PMO. You see, the PMO can provide this highly relevant information, accurately and timely, but, most important of all, quickly and easily.

Consider the elemental estimate at completion, or EAC. The basic way of calculating this obviously extremely relevant piece of information is to divide the budget at completion (BAC) by the cumulative cost performance index (CPI). (For those of you who don’t have an EVMS that can deliver this piece of information, stand by.) Studies have shown (Christensen, et al) that a project’s CPI only rarely varies more than 10% once the project has cleared the 15% complete mark. The implication here is that the BAC / CPI formula is going to be accurate to within ten points once the project is only a bit out of the starting gate. But another fascinating piece of this puzzle is that the BAC / CPI formula can be algebraically reduced to dividing your cumulative actual costs by the estimated percent complete. Our “friends” the accountants have the first of these numbers. All the PMO team member needs to do to deliver an accurate estimate at completion is to come up with an estimate of the project’s percent complete, and this is not that difficult of a parameter to nail down. All you need is one subject matter expert, and you’re there.

And here’s the kicker – the same thing is true for duration!  Simply divide the cumulative duration by the same estimated percent complete, and you have a poor man’s calculated schedule end-date, and it’s going to be accurate to within 10%. Now, I have a couple of questions I would like to pose. To all you project managers out there, I’m going to channel my inner Montgomery Scott, from Star Trek IV, The Voyage Home. Scotty has just shown a plant manager/engineer the formula for transparent aluminum, and asks him “Would that be worth somethin’ to ya?” If I could tell you to within 10% how much your project is going to cost at completion, before you are even half-done, and how long it will take, quickly, easily, cheaply – is that worth somethin’ to ya?

And to all you PMO directors – I just showed you how to quickly, cheaply, and effectively alleviate the fear of all of those managers who want to avoid looming project disasters stemming from a lack of information. Is that worth something to you?

It’s not pleasant to think that your organization, which, perhaps, set up its Project Management Office with much fanfare and enthusiasm and put you at its head, may be harboring those who are not only reluctant to help you succeed, but are determined to frustrate your goals, techniques, and advancement, and actively desire your failure. But it is true, and the sooner you and your team understand that, the better your chances of advancing. Typically, the PMO has two major enemies, and I will address them in reverse order of the threat they represent.

The first class of enemies the PMO team must be aware of is the Accountants. Yeah, yeah, I know, they come across as benign number-crunchers, but, generally speaking, they are anything but, and to understand why we must articulate the specific mission of the Project Management Office. The PMO exists for one reason above all: to put into the hands of decision-makers the information they need about project performance. If there was an Harry Potter-like spell that could magically deliver this information (“Projecto Performi Educationo!” perhaps), then all of that effort your team puts into setting up work breakdown structures, cost baselines, schedule logic, and then collecting costs and status – it would all be moot (I didn’t include risk management, ‘cuz it’s already a waste of time). So, it follows that you as PMO lead are the advocate for an information stream, and an extremely valuable one at that. Knowledge of which projects are performing better than others has huge implications, ranging from an early tip-off of when a project is going off the rails, to which proposals your organization should be pursuing or ignoring, all the way to whom among the management team are performers, and who, well, isn’t. In any organization, information is power, and this type of information is to management what Sith lightning is to dark Jedi masters acquiring political status. It is virtually indispensable, to those who recognize it for what it is.

Ah, there’s the rub. So much of management “science” has been dominated by the asset managers’ (read: accountants’) narrative that there are many organizations, large and small, where the project management-types don’t even have a place at the discussion table. But you just know that at these companies, the head of the finance and accounting has a place at the table, and probably near the head. These people are convinced that any piece of management information that has a currency sign in front of it must come from the general ledger. When the PM-types start demonstrating the power of even an elementary Earned Value Management System, this makes the asset managers very nervous, or even apoplectic. The asset managers’ narrative cannot survive the alternate memes, that their own information stream is but one of three needed for true portfolio management (what are the other two? Click here). And they’re not going to sit back and have that narrative impinge upon the perceived efficacy of their own information stream. They will strike back, either by minimizing the power of the PMO’s information stream(s), or by maximizing the perceived power of the general ledger to do things like, say, generate a reasonable estimate at completion (EAC), which it utterly can’t. In short, the CFO is not your friend.

Enemy number two is more insidious, because it’s more stealthy, even while it’s under our very noses. Consider the Project Management Institute® (don’t get ahead of me here – they’re not the enemy, they are enablers). The PMBOK Guide® is divided into nine sections: Scope, Cost, Schedule, Risk, Communication, Human Resources, Quality, Procurement, and Integration. And yet, none of these sections addresses the limits to the efficacy of their advocated information streams (or parts of the streams). It’s as if nine authors (or, if I know PMI®, committees of authors and editors) were given nine different-colored crayons and a coloring book, and told which parts they should color. The result was that none respected their epistemological lines, attempting to color the whole, and no one would call them on it. I don’t mean to pick on PMI® here – virtually all of the organizations that set themselves up as standard-bearers for project management “science” end up becoming inadvertent vehicles for charlatans and hucksters, pushing their narratives in order to maximize their own particular perceived value, while muddying the waters of legitimate management science scholarship. The director of the PMO becomes the victim of the overreach of PM advocates everywhere, and they are everywhere.

As Pogo said so many years ago, we have met the enemy, and he is us.