Game Theory in Management

In last week’s blog I discussed some of the considerations that PMs should take into account once the nominal business re-start mayhem begins. This week I would like to examine a couple of long-held management tropes that should definitely be avoided, both in the short term and, well, permanently, if I were to get my way. Last week we looked at some useful business structures to help place our organizations with respect to the competition along the lines of the axiom, Quality, Availability, Affordability – pick any two. But what happens if we take a look at the macro-economic restart picture from the other side, as in the characteristics of the business models of the organizations that are about to fail? I’m thinking analysis into a pair of highly suspect management science “theories” will reveal them for being the invalid ideas that they have been all along, widespread acceptance notwithstanding.

First Up: Our Friends the Asset Managers

I’ve often criticized, questioned, and even ridiculed the core belief of Asset Managers, that the point of all management is to “maximize shareholder wealth.” Adherence to this mantra is extremely common among college-level business schools; in fact, it’s usually thought to be challenged only by the most ignorant of managers or students. Its logical (if extreme) extension was perhaps best articulated by former General Motors chairman Thomas Murphy, who is credited with having said “General Motors is not in the business of making cars. It is in the business of making money.”[i] This was supposedly asserted in the 1970s, when GM was king of the automobile market. Within the decade it would find itself in serious trouble from a variety of competitors who were, apparently, more interested in making cars (superior products), confident that the profits would follow. GM would ultimately – and notoriously – need a government bailout due to its bankruptcy –yes, bankruptcy – in 2009. The bailout costs the taxpayers of the United States $11.2 billion dollars. How’s that for pursuing a business strategy predicated on “maximizing shareholder wealth?” Indeed, the landmark book Crossing the Chasm, by Geoffrey Moore (Harper Business Essentials, 1991) pretty much solidified the case that organizations only concentrate on the maximizing of shareholder wealth at a phase in their life-cycle when they are no longer concerned with attracting or retaining customers.

Apparently, none of this textbook case of a management science disaster predicated on a tightly-embraced concept has made even the slightest dent on the faculty lounges of the major business schools of the United States. So, here’s my little litmus test, to see if this axiom has any legitimacy: Of those organizations that have based their business models on the “maximizing shareholder wealth” cliché, which ones will be the most successful at the restart? Consider that such organizations will be more inclined to send revenue towards dividends, rather than paying down debt or enlarging reserves – the same reserves (or credit ceiling) needed to retain or rehire staff. Contrast this approach with the Project Management-centric organization, oriented towards attaining customer-specified goals of scope, cost, and schedule. Such organizations will be far more likely to have built a larger, more loyal customer base, the same customer base needed to return to a profitable operational status quickly. For now, we can speculate, but it won’t be long until more empirical data will be available to test the robustness of the organizations that have embraced the “maximize shareholder wealth” hypothesis.

Next: One of My Favorite Targets, the risk managers

I get the impression that if a statistically significant number of project risk analyses had included the threat of a global pandemic bringing a massive amount of disruption to the normal business cycle, we’d be hearing about it by now, even if the estimated impact was off by a large factor. The fact that this exact scenario did occur points to yet another shortfall of modern risk management theory, perhaps best articulated by Nassim Taleb in his can’t-miss book The Black Swan; The Impact of the Highly Improbable (Random House, 2007). Taleb defined Black Swan events as having three characteristics:

• Completely unexpected,
• Had a large, significant impact, and
• After the fact, people tend to convince themselves that the event could have, in fact, been predicted.

…which brings us back to how a project risk analysis is currently performed. Scenarios that include bad weather, or changes in prices for materials, parts, or specialized labor, can have their cost and/or schedule impacts guessed at estimated, budging the cost and schedule baselines maybe 5 – 20% over plan. But, as COVID 19 has shown, to bring truly massive amounts of disruption into a project plan requires a Black Swan event which, by definition, is completely unexpected. In short, having an advanced risk management (no initial caps) capability in no way adds to an organization’s ability to survive a significant macro-economic disruption. So why does anybody think it will help in managing the more mundane PM events that unfold?

Despite their widespread use, I’m convinced that management strategies based on the Asset Managers’ or risk managers’ basic tenets are flawed, and ought to be abandoned straight away. If not, then we’ll see what characteristics are shared by the organizations that survive the current stress test. My bet: the survivors will be more project/product oriented than those that don’t make it.

[i] Wikipedia contributors. (2019, May 27). Thomas Murphy (chairman). In Wikipedia, The Free Encyclopedia. Retrieved 18:53 MDT, May 4, 2020, from https://en.wikipedia.org/w/index.php?title=Thomas_Murphy_(chairman)&oldid=899030673

Sooner or later, our projects are going to start back up, and some organizations will conduct this restart better than others. How will they do that, exactly? Well, here are a few points to consider when the commercial environment makes solid moves back towards normalcy.

First, let’s consider the implications that come with a blank slate, or the resetting of the business environment. Recall the oft-stated GTIM axiom, of Quality, Availability, Affordability: pick any two. When the massive economic timeout was called, which two of these three did your organization pursue most energetically? It’s important, because:

• If your organization’s product or service was a quality leader, and was priced that way, then availability was probably okay, i.e., no significant wait times. When the planet’s economies come back on-line, this aspect will be stressed, as pent-up demand will challenge your previous levels of availability. When that happens, management will need to make a decision, whether to hedge on some aspects of quality, raise prices, or be prepared to arrange for wait lists. Keep in mind, any of these has the potential to reduce the organization’s market share; but, since availability was previously a strength, then wait lists are (generally speaking) the biggest potential threat to a successful restart.
• On the other hand, if your organization’s product or service was readily available and affordable, but wasn’t necessarily known for its rare quality, then your ability to attract your competitors’ pre-timeout customers will be predicated on your ability to convince them that your organization’s version of the good or service is “good enough” for the job. This also assumes that such an organization is in a position to regain its potentially furloughed staff, since, generally speaking, those companies that concentrate on affordable and available goods and services do not require a preponderance of highly-skilled staff, which makes them vulnerable to higher turnover rates, which carry with them their own difficulties.
• Finally, high-quality and readily available goods or services already had waiting lists prior to the macro timeout, and restarting activities will probably focus on reconciling the backlog. However, while this is going on, the competitors with the previously-addressed characteristics will be seeking to gain market share by picking off those customers who have the budget, but not the time.

Now let’s shift gears again, and consider the Corner Cube hypothesis. Harkening back to another oft-stated ideas, that there are three distinct and different types of management, to wit:

• Strategic Management is focused on market share,
• Asset Management wants to “maximize shareholder wealth,” and
• Project Management seeks to deliver scope on-time, on-budget, for what are essentially customer-specified parameters.

A little mental exercise here: which of these are the goals of start-up companies? Do entrepreneurs tend to base their decisions on, say, how much return they can expect from their investments? Or do they not rather invest large amounts of their own time and talents in an effort to attract and satisfy customers? Of course customer satisfaction, i.e. Project Management, is the priority, as laid out in my very first published (and peer reviewed) article, Managing to the Corner Cube; Three Dimensional Management in a Three Dimensional World (https://www.pmi.org/learning/library/three-dimensional-management-world-5329). In fact, successful start-ups will generally follow this progression:

• Do whatever it takes to attract and satisfy customers in the organization’s field of endeavor.
• Only after a strong customer base has been attained will deliberate efforts at increasing market share commence, meaning that Strategic Management will take precedence over Asset Management. When I say “deliberate efforts,” it’s because the establishment of a strong customer base will usually automatically increase or establish some level of market share, and in a way that successful Asset Management, well, won’t.
• Remember the axiom that the point of all management is to “maximize shareholder wealth?” Well, the Corner Cube hypothesis refutes this directly, and here’s Exhibit A: only after a reliable customer base has been established AND an acceptable market share secured will the successful manager even think about increasing return on investment.

Soooo, what does this mean in re-start space? Even those organizations that have met their goals of customer base, market share, and return on investment will easily find themselves having to approach the re-start as if they were brand-new, meaning Project Management re-emerges as the most important, most immediate goal of the re-starting organization.

But then, that’s been the real goal this whole time, hasn’t it?

As we approach the peak of the COVID-19 pandemic, part and parcel of the post-event analysis will include attempts to answer the question: how much did this cost us, and how much time did it remove from our productivity? Whether by nation, macro-organization, corporation, small business, or from the point of view of specific industries or families, the upcoming weeks and months will, no doubt, see many attempts at quantifying these impacts, usually in order to ridicule political opponents, but more importantly to ascertain those business strategies that are most effective at making the analyses’ target group more economically resistant to similar future occurrences. Unfortunately, both purposes of analysis invite quackery, and in massive proportions. Those who are supposedly looking to advance management science can be counted on to advance their own particular pet theories (although establishing how risk management [no initial caps] can help insulate organizations against pandemic shutdowns would be quite the reach, I fully expect something to be pushed that way). And yet, this serious question needs a serious treatment, regardless of charlatans muddying the waters. How can this be done, precisely? As fate would have it, I have some experience in this type of scenario, and the good news is that the solution is far simpler and easier to access than almost all of the alternatives often pursued, and that optimal approach comes from basic PM.

First, let’s dispense with the intuitive but nevertheless incorrect notion that estimators can deliver the information being sought here. They can’t, as is easily observed by considering the common practice among projects to derive a “bottoms-up” estimate at completion, or EAC. Back when I was working to attain my estimator’s certification I was taught that there were three types of estimates:

• Order or Magnitude, or “ballpark” estimate, derived by comparing your intended project to similar work done previously, and accounting for differences in size, function, geographic and inflation. The bases of comparison are published by organizations whose data has been shown to be consistently reliable; however, these estimates’ accuracy is rated between 45% and 60% of final costs.
• A Budget Estimate lists the intended resources by type (Heavy Equipment, Labor [by type], Overhead, Hotel Load, etc.), based on the most recent information for each category. Perhaps the most common type of estimate, these are rated at between 30% and 45% accuracy.
• A Detailed Estimate is usually produced by a professional estimator, using off-the-shelf software for that purpose, and is so detailed that it can be handed off to the procurement specialist to begin buying the labor and materials needed to work the project. This type of estimate is accurate to within 15% and 30%.

Keep that last accuracy bracket in mind as we proceed with this analysis – a professional estimator, using OTS estimating software, can be expected to be up to thirty points off of the real answer, and even the optimal scenario is 15% accuracy.

However, what’s being estimated here isn’t a project. It’s the impact of a Black Swan event (as described in the excellent book by the same name by Nassim Taleb) across a broad spectrum of organizations and projects. There is simply no reliable way of knowing what a “final impact” of any given occurrence, much less one with the massive, far-reaching impact of a pandemic, could have on any given subject. The trucking industry is being hard-pressed by the unavailability of the facilities that drivers need, and that can perhaps be quantified. But what about the impact of lower fuel prices? Yes, hotels are largely slowing down or shutting, but demand from on-line retailers is jumping. How to cross-evaluate these factors, and dozens, if not hundreds more like them? It’s simply impossible to do. Facilities such as restaurants can compare their pre-virus numbers to post-virus versions, but since when does any business, let alone an entire industry, experience level revenue figures across weeks, let alone months?

“Alright, Michael” I can hear GTIM Nation say, “how does one calculate the impact of a shutdown, as your title implies?” Here’s how it’s done, at least in project space.

Watch your Cost Performance Index (CPI) and Schedule Performance Index (SPI), at the cumulative level. For those new to these information streams, these are derived so:

CPI = BCWPcum / ACWPcum

SPI = BCWPcum / BCWScum

where BCWPcum is the cumulative Earned Value, ACWPcum is the cumulative actual costs, and BCWScum is the cumulative time-phased budget. What you will see happen is a sub-1.00 spike in both indices (1.00 is performance exactly as planned; below that number indicates trouble, for both indices) downward in the next couple of months, most likely more pronounced in SPI than CPI. Then, over the following few reporting cycles, you should see these figures climb their way back to where they were before, the speed with which they do so determined by the robustness of the subject organization. How accurate is this method? Studies have shown it’s good to within ten points. This method of impact quantification is not only accurate, but it’s best simply because it’s not predicated on the thousands upon thousands of parameters which, even if they were identifiable, cannot be reliably captured.

If you have no Earned Value Management System in place, two things: are you really doing Project Management at all? Secondly, well, I can’t help you.

Also, stay safe out there.

In last week’s blog I teased that I was going to reveal a strategy to deal with the natural human instinct to act out of self-interest well before the benefit of the group, after having established:

• The standard template for establishing a Project/Program Management Office (PMO) for the intent of advancing an organization’s PM maturity is both (a) ineffectual and (b) extremely susceptible to individuals looking out for their own interests over the goals of the macro organization, and
• Such self-interests-based behaviors cannot simply be rooted out, particularly and especially via attempts to leverage organizational power over the targeted groups (in other words, it’s very close to impossible to force an organization to advance its capability maturity, especially Project Management).

So, impossible puzzle, right? Maybe. I mean, after all this time and all the articles, columns, and, yes, blogs on the topic of the optimal strategy to advance PM within the macro organization, you would think that a workable solution would have been developed long ago. And yet, here we are, the universal acceptance (embrace, really) of the Asset Managers’ business world-view, while we PM-types can only point to an uneven utilization of our techniques, at best.

Before jumping into my ideal implementation strategy, I’d like to take a moment to examine the implications of the situation laid out in the previous paragraph. Let me state this now, loud and clear, and for the record:

The main reason that the Asset Managers’ take on management science dominates the business world and academia is solely based on governments’ need for tax revenue.

Not only is the previous sentence true, but any manager who has given it a few minutes thought knows it to be so intuitively. It is governments who see corporations as potential sources of revenue, and it’s the Asset Managers who maintain that the point of all management is to maximize said revenue. Individuals view corporations in terms of what those organizations can provide, and at what price point. It’s all the non-government actors in the free marketplace who care about things like quality, availability, and cost, which is another way of saying real people care about scope, schedule, and budget, the main three pillars of Project Management philosophy and science. Only those who are (at least) one step removed from the actual transactions that take place in free market economies are focused on things like taxable liability, or the “bottom line” on the Profit and Loss statement.

Now, allow me a moment to introduce a radical concept into the faculty lounge where all the “true” management science stuff is made up derived. The fact that the Asset Managers’ approach to monitoring any and all businesses’ fiscal performance must be in place prior to these businesses opening their doors HAS NOTHING AT ALL TO DO with whether or not the information streams emanating from such approaches represents an optimal (or even adequate) basis for making management decisions. Nothing. Unconvinced? Follow me on a little intellectual exercise.

Recall one of my previous assertions, that there are three types of management: Asset, Project, and Strategic, each with their own goals, methods, and information streams. What if governments taxed corporations on the basis of market share (i.e. the Strategic Managers’ realm)? Say, for every 10% of a given market controlled by a given corporation, the tax rate would be 5%, so that, for a monopoly, they would have to pay a 50% tax rate on gross revenue, and so forth. Do you think any business owner would give a second thought to the claimable depreciation rate on the copier just purchased? Or, what if (I love this one) those organizations engaged in project work could see their tax rates lowered based on the percentage of projects that came in on-time, on-budget? PMI® would, virtually overnight, wield far more power than any other professional organization.

(GTIM Nation: So, what’s this strategy already? Me: I’m getting there, honest.) This all comes back to the fact that human nature will always win over optimal management science techniques or strategies. Always. As long as the proper incentives are in place, advancing a specific management capability is going to be straight-forward and achievable. Absent the incentives that appeal directly to the decision-makers self-interest, those attempting to convince the macro organization to do things differently will always be on the outside, looking in.

In short, to advance the technical agenda of the PMO, stop hectoring other people with policies, procedures, and, well, nagging. Establish and articulate an implementation strategy that places PM techniques squarely within the organization’s pursuit of its members’ self-interest. If this requires a rejection of those PM guidance-generating orgs that mandate stuff like, oh, I don’t know, risk management (no initial caps), then that’s just too bad…

Although I generally like to avoid examples in extremis, I would like to review a virtual pandemic that hit a virtual world, one that I discuss at length in my second book, the book this blog is named after, Game Theory in Management. The subtitle to that book is the same as the subtitle to this blog, too: modeling business decisions and their consequences. The virtual plague took place in the World of Warcraft game, which is typically referred to as an MMORPG, or Massive Multiplayer Online Role-Playing Game. Its “world” is Azeroth, and players belong to one of two warring populations. However, within these populations are sub-groups, or tribes if you will, who do not necessarily work together in combatting their nominal enemies.

Into this setting was introduced a disease, the “Corrupted Blood” incident. In the words of Joel Hruska, from ExtremeTech, fifteen years ago,

The boss of the Zul’Gurub raid instance, Hakkar the Soulflayer, had a debuff he could apply to nearby players that caused damage every few seconds. The debuff was designed to kill players quickly enough that anyone without healer support would die fairly quickly.

Unfortunately, Blizzard made a mistake. Hunter pets, if put away while the debuff was applied, would still have it when they were pulled back out again — like, say, in a populated area. That was the first problem. The second problem was that Corrupted Blood was infectious, and spread to people nearby. The third problem? NPCs (non-person characters) could catch it. When they did, they didn’t die. They just transmitted it to everyone within range, indefinitely.[i]

In my research while writing Game Theory in Management, I came across stories of those characters with healing powers offering their services at inflated prices (supply and demand hold sway over virtual worlds as well as our own, it would seem), characters deliberately teleporting infected animals into enemy’s population centers (biological warfare), and, perhaps one of the more chilling virtual behaviors, characters would assume the role of journalists, approach population centers that may or may not have been infected and therefore deserving of quarantine, assess the situation from afar, and then re-position themselves at nearby road junctions to inform passerby of that center’s status – or not. It seems some characters were known to, shall we say, adjust the message depending on whether or not the recipient was of their own tribe or clan.

I would like to point out that, in spite of entreaties from Blizzard Entertainment for the players of World of Warcraft to initiate behaviors that would eradicate the plague within the game itself, insufficient numbers of players did so, necessitating a hard re-set of the entire shebang in order to rid Azeroth of the disease. In short, when called on to behave a certain way as to benefit the entire population, individual players in sufficient numbers elected to act out on their own interests, which prevented any but the most drastic of solutions from actually working.

Meanwhile, Back In The Project Management World…

It has been my experience that the go-to implementation strategy for advancing Project Management within an organization (particularly large ones) entails some form of the following steps:

1. Tap into the energy generated by the organization’s realization that an advancement in PM is needed, usually due to some project (or projects) going off the rails in dramatic fashion.
2. Hire or promote “experts,” and create a Project Management Office (PMO), or at least a team that does PM.
3. The PMO/Team performs an analysis of the level of PM maturity in place, and creates a document for advancement.
4. The PMO/Team continues to generate documents, this round creating official policies or procedures, that mandates certain PM-related practices and artifacts.
5. Some projects will embrace the new techniques, but many will seek to opt out, either by asserting a basis for exemption from the procedures, or by engaging the silent veto/slow roll tactic.
6. To the extent that the organization’s major projects have improved their PM practices, overruns and late project completions are reduced, and the amount of energy that went into the creation of the PMO begins to dissipate.
7. With no major overruns or delays to justify the expense of all those experts in the PMO on the payroll, and with significant amounts of project work not adhering to the PM procedures, the need for the PMO begins to be challenged in the organization’s executive suites, until…
8. Another project disaster happens, and the cycle begins anew.

The behaviors of (most of) the organizations in this approach mirrors those of Corrupted Blood-inflicted Azeroth, in that no amount of urging individuals to act for the common good but not necessarily for their own benefit will bring about the desired macro-organizational change. Self-interest will always manifest itself – not universally, to be sure, but in sufficient amounts to keep the desired organization-wide change/maturity advancement from occurring. It’s simply human nature. That being the case, the solution to the self-interest problem must include…

Look at that! Out of pixel ink for this week. Tune in next week for tips on advancing PM in a macro organization driven by individuals predominantly looking out for themselves.

And please stay safe in this world.

[i] Retrieved from https://www.extremetech.com/gaming/307717-researchers-wow-corrupted-blood-plague-to-understand-coronavirus-infections on April 5, 2020, at 19:58 MDT.