Game Theory in Management

Nature can be brutal. I’m not just talking about all those documentaries where zoomed-in praying mantises are chowing down on some other unfortunate insect, or where the cheetah actually catches the gazelle. Rather, I had in mind the footage of the various animals coming to the crocodile-infested watering hole to get a drink, all of their senses straining to notice the slightest perturbations in the water that would signal an imminent attack. One of the lighter versions of this story involves a mother elephant, essentially stomping a hapless croc into the mud while her baby gets its fill. My city’s municipal water supply may be notorious for pumping hard water, but, when I go to the kitchen faucet to get something to drink, at least I don’t have to worry about huge carnivores essentially unchanged since the Pliocene Epoch popping out of the pipes looking for a quick meal.

Meanwhile, Back In The Project Management World…

Then again, the other world that I inhabit does have some characteristics with such environs where certain errors can lead to (managerial) extinction, especially when macro-stressors hit the global economy. During such events, what management strategies will lead to greater business model robustness, and which themes or narratives, well, won’t?

Let’s use the example of the famed Hostile Takeover, the management world equivalent of a watering hole croc jumping up and swallowing a small mammal whole. What happens during a Hostile Takeover? The acquiring organization buys up the target company’s stock in an attempt to gain a controlling share, and then forces the target into bankruptcy. On an almost exclusive basis, the target company’s stock prices jump in value to mirror the new demand, meaning that the target’s shareholders are literally seeing their “wealth maximized.” Additionally, it’s also very common for the acquiring organization to fail to recoup the expense of the hostile takeover by selling off the target’s assets, meaning that the acquiring organization is definitely not maximizing their shareholders’ wealth. This being the case, why would any acquiring organization make the attempt in the first place, and why would the targets’ management resist?

It’s all due to market share, the coin of the Strategic Managers’ realm. By eliminating a competitor, those goods and services offered by the target are quickly removed from the marketplace, creating an opportunity for the acquiring organization to expand their percentage. So, what can be reliably inferred from the occurrence of a macro-stressor event in the middle of this market-share fight? Consider the major factor in any organization’s ability to restart after a slowdown (or even shutdown) event: the ability to retain or attract a loyal customer base. The relative wealth of the recovering organizations’ shareholders has very little to do with that organization’s ability to speedily rebound – in fact, it may be detrimental in those cases where retained earnings were distributed to said shareholders instead of paying down debt, creating reserves, or enhancing the customers’ experience. And, while market share is clearly essential, at the end of the day it has to be considered to be a trailing indicator. Market share may be influenced by the existence (or lack thereof) of competitors, but it’s the decisions of customers, both existing and potential, that drive the market share statistics, not the other way around. If the “maximize shareholder wealth” meme of the Asset Managers can’t inform the selection of management strategies to rebound after a slow/shutdown, and neither can the market share brass ring of the Strategic Managers, doesn’t that just leave Project Management?

Why, yes, yes it does.

Recall that the central tenets of PM, the so-called triple constraint of Scope, Cost, and Schedule, are all set by the customer, either directly or indirectly through the Request for Proposal, Bid, and Selection process. The Project Management realm is the only one exclusively focused on the customer – Asset Managers’ information streams deal with the assets internal to the organization, and the Strategic Managers’ focus is on the organization’s performance with respect to the competition. If your organization is really good at PM, either by setting up and maintaining an outstanding training/education system, or attracting (read: paying for) advanced talent in the PM realm, it falls to reason that such an organization will be far better positioned to withstand macroeconomic stressors, once some version of normalcy re-emerges.

In short, if your organization has chosen to pursue a robust PM capability, instead of basing its management strategies on “maximizing shareholder wealth” or elbowing aside competitors for more market share, you are in a position analogous to the baby elephant, approaching the macroeconomic watering hole after a long drought.

And mama elephant PMI® is right over your shoulder.

I’ve been hearing a lot of advertisements of late that incorporate some of the factors and circumstances surrounding operating or restarting business during and immediately after government policy and socially-driven restrictions begin to ease or go away altogether. Something that I’ve noticed about these ads is an irksome consistency, almost as if they were all written by the same advertising agency, employing the same copywriters.  These templates are usually highly consistent with the following:

“Hi, we’re (company name), and we have (been with this community a long, long time; had the honor of serving you over the past few years; just became a member of this city), and know what it means to (struggle through these times; face challenges we never thought we’d face; work to come together to overcome a shared crisis).  In these difficult times (“difficult times” and “new normal” don’t get alternative phrasing – I suspect there’s a law that says these exact terms MUST be used) we’re here to help you (get through these difficult times; serve your needs during these difficult times; help you adjust to the new normal). We’re open for business, and can arrange for (our people to perform their service in your home while maintaining social distancing protocols; us to deliver your order to your door; you to pick up your [product] using curb-side delivery). Please call us at …” Oh, sure, there’s some additional fluff thrown in, but these four sentences seem to make up the bulk of all recently-introduced advertising. There’s even a hilarious YouTube® video, spliced together from some national (or even international) campaigns that use the exact same verbiage, over and over.

This got me to thinking about all of the paper presentations I’ve subjected myself to over the years, at Project Management-centered conferences and seminars, and even a symposium on artificial intelligence, and how a certain consistency in messaging seems to pervade all of these macro-communication events as well. This, in turn, got me to thinking about what my present-day self would tell my thirty-year-old self about how to pick sessions in a PM (or other) conference, based on clues in the short synopsis listed in the conference’s schedule, or program.

The first thing I’d tell my younger self would be is that there are, broadly speaking, three bins in which virtually all conference papers can be placed:

• Yet another reiteration of rather old and well-known management strategies or techniques (usually Earned Value or Critical Path methodologies, but others have used this approach, as well), and how macro organizations really, really need to adapt them on a larger scale. The reasons for this push for broader usage typically come down to:
  • Everyone knows this is the right way of doing things; well, if not everyone, then certainly the people in the know.
  • Organizations that have adapted these practices broadly are more successful than those that don’t. And, if you ask us to back up this a priori assertion, we’ll point to anecdotal evidence only.
  • Anyone who disagrees with this paper presentation is an idiot.

I refer to these as “eat-your-peas-style hectoring” papers, and make every effort to avoid them. Their giveaway phrases in the seminar program are “basic” and “fundamental(s) of…” If you see either of these phrases, do something else with your time.

• The presenter was a bit key player in some gee-whiz project, and their success (rarely defined in terms of coming in on-time, on-budget) was due to some component of the PM codex, and the presentation has to do with the story behind the epiphany that led to this “success.” The giveaway here is the mention of the aforementioned gee-whiz project anywhere in the program’s syllabus.
• This last bin is the rarest, but most valuable: it is composed of those presenters who have actually performed some legitimate academic research, have developed some management insight or supportable hypothesis, and are looking to publish or socialize the results. These are usually identifiable by the absence of the previously-mentioned indicators.

Perhaps the primary reason the third category is so rare has to do with its very nature. Any valid research that paves the way to enhanced PM strategies or techniques that also has the characteristic of being transferrable AND scalable is obviously going to be a thing of value to the organization where it was discovered or derived – hence the reason business methods are patentable, as long as they meet the following criterion:

• It must be novel and non-obvious.
• It must be a process that creates a useful, concrete, and tangible result.
• The business method must involve some kind of technology, hardware, or equipment.[i]

Now ask yourselves, GTIM Nation: If you were to develop a management science technique or insight that met all of these criterion, would you rather (a) find a way to monetize it, in such a way that it brings compensation to you and/or your organization, or (b) pay money out to seminar sponsors for the honor of presenting such an idea to complete strangers, whose only possible avenue for recompense would be a high ranking on the speaker evaluation forms?

This means that the safest venue for third-bin presenters would be … authors of PM-themed books. Their motives are, well, if not pure, then purely understandable – they want to sell more books. They’ve done the research, and have put their usable ideas into a transferrable packet – otherwise no publishing house would bother with them. And, by developing and researching their ideas to a usable end, they end up advancing Project Management science in ways that the eat-your-peas hectorers or “my project was a success because of me” presenters could never approach. So, to my 30-year-old self, I would advise: seek out the columnists, bloggers, writers. That’s where the worthwhile ideas get vetted.

But if any of these authors starts on about “these difficult times,” then they’ve lost me.

[i] Retrieved from https://www.legalzoom.com/articles/what-a-business-method-patent-is on May 25, 2020, 19:10 MDT.

A few weeks back I blogged about the appropriate way of calculating the impact of the COVID-19 shutdown on our organizations, and pointed out one method that will probably be pushed as valid, but really isn’t. This week I want to take on perhaps the mother of all wrong methods for calculating the impact of a Black Swan event[i], one rooted in several highly questionable but widely accepted premises of modern management science theories. To be clear, I’m only referring to these notions as “theories” due to their rate of acceptance, not because they have been suitably verified (or tested, really) with empirical data or repeatable experiments.

Let’s work backwards from the actual analytic approach under my microscope, shall we? My sense is that there are going to be hundreds, if not thousands, of executives who will request their cost performance experts to quantify the cost impact of the slow/shutdown by pouring through General Ledger data, line by line, and identify which costs are attributable to the slow/shutdown, and which are not. I hold this to be an invalid approach, for the following reasons:

• In order for such an analysis to be remotely reliable, the ones poring over the data must be fluent in the differences between proximate cause, and material cause. The former is a clear and direct causal factor, from one event to another, similar to domino #1 falling over and forcing domino #2 to also fall. Material cause, on the other hand, must pass the if-not-for test, as in domino #2 would not have fallen from domino #1’s toppling if not for someone standing it up in close proximity to domino #1 in the first place.
• If the case for material cause can be made, the next impossibility would be to quantify how much responsibility, expressed objectively, should be split between the proximate causes and material one(s). Commercial and civil liability cases involving a jury setting the percentages of the culpability of the various defendants usually turn on such an analysis, and even here the findings often defy logic. In the domino example, we know that domino #2 fell. Let’s pretend that this had a serious, negative impact on our organization. What percentage of the total damages should be assigned to the person who knocked over domino #1, and how much should be assigned to the person who placed them upright so close to each other?
• If the previous bullet appears next to impossible to quantify, consider how ridiculously simple that example is compared to the near-chaotic environment of the near-infinite working parts of the local economy, let alone the regional, national, or global variety.
• In the face of such dizzying analysis parameters, how many of the executives ordering just such an analysis do you suppose will do so equipped with a readily-understandable guide, or template, usable as a sort of litmus test for every single line item in the General Ledger?
• And, in those rare instances where such guidance is provided, I can guarantee that none of them can preclude multiple exceptions. Some costs believed to be attributable to the shutdown, but actually had nothing to do with it, will be included in the tally, and vice-versa. Metcalf’s Law, also known as The Butterfly Effect[ii], virtually guarantees it.

Pulling the thread a bit further, it’s easy to see why the poring-through-the-General-Ledger approach is often considered the obvious way of approaching the impact quantification problem: generations of business degree holders have been taught that the General Ledger is the source and residence of all management information that has a currency symbol in front of it. Recall, however, my oft-stated distinctions between the three types of management:

• Asset Management is centered on the organization’s assets, and its main tool is the General Ledger;
• Project Management focusses on customer-generated performance standards of scope, cost, and schedule, with its main information streams based on Earned Value and Critical Path Methodologies;
• Strategic Management is all about relative market share.

Now ask yourself, where in the balance sheet or profit-and-loss statement can we see information about your organization’s market share percentages? Of course, it’s not there. That’s not what those reports convey. Then why should anybody expect them to show the cost or schedule performance impact of a pandemic? Unless COVID-19 destroyed or harmed a company asset, the General Ledger simply cannot convey any meaningful quantification of the impact of the pandemic on the organization, save the singular data point, relative revenue changes.

And that, GTIM Nation, is NOT how one quantifies the impact of a shutdown.

[i] See Nassim Taleb’s outstanding book, The Black Swan; The Impact of the Highly Improbable, Random House, 2007.

[ii] Usually expressed as the question “If a butterfly flaps its wings in Brazil, does it cause a hurricane in Texas?,” the more formal definition is that relatively small perturbations in far-flung nodes of a large network can have a cascading effect, bringing massive changes to nodes on the other extreme of said network.

My oldest son was telling me a story about a time when he was watching a movie with his fiancée at her parents’ house, late at night. Without warning, a series of events unfolded, taking no more than five seconds from start to finish:

• A large insect flew into the room (“at least the size of a silver dollar”).
• It headed upwards, towards the ceiling fan, and was promptly whacked by one of its blades.
• The insect (possibly a large beetle, but no one knows for sure) crashed to the ground.
• The family’s dog, Charlie, rushed into the room, seemingly from out of nowhere.
• Charlie retrieves the insect, and rushes outside with it via his doggy door.

The four inhabitants of the room were left looking at each other, puzzled – did what we witnessed just then really happen? And, assuming so, should we be doing anything about it right now?

Meanwhile, Back In The Project Management World…

We are quickly approaching the time when the governments of the various nation-states afflicted by the pandemic will begin to ease up on the policies working as brakes on the global macroeconomic environment. As GTIM Nation is fully aware, an additional set of characteristics that I like to point to concerning the distinction between the three types of management are:

• Asset Managers’ focus is entirely within the organization itself;
• Strategic Managers are paying attention to people outside the organization, but not its customers; specifically, the competition’s actions and strategies,
• while Project Managers are looking at all the people outside the organization, but not its competitors – PMs are about customers, both existing and potential.

This is an important distinction, in that it highlights (yet another) reason why PM ought to be considered more important than the agendas of either the Asset Managers or the Strategic Managers (but don’t tell the business school faculties!). Consider the introduction of Agile/Scrum Project Management, in 1986. Information Technology (IT) projects, while clearly needing some form of PM to help curb the relatively high number of project overruns and late deliveries, were still struggling with issues stemming from traditional Configuration Management. It was simply not feasible for most (if not all) IT projects to funnel changes to their software in-development through a formal Baseline Change Control Board, considered the best guarantor of preventing scope creep. Such boards typically met only once per month, and required attendance not only from both the project teams’ organizational management, but also from the higher levels of the customers’ representatives. If a given Baseline Change Request or Proposal (BCR or BCP) was approved, then all was well. However, if it were to be rejected, or sent back for additional information or modifications, critical time and effort would be lost, with no expedient remedy available. Oh, sure, some IT-project based orgs would allow some sort of fast track, or urgent BCP/BCR, but that didn’t really fix the main problems associated with an ossified change control process. Agile/Scrum changed all of that by assuming that changes would be not only accommodated, but pretty much expected, and on a regular basis. By assigning specific titles and roles to customer and project team representatives (e.g., “Scrum Master,” etc.) in weekly (at least) meetings, such changes could be evaluated for appropriateness and priority in a highly expedited fashion. This strategy brilliantly addresses a need for retaining certain elements of “traditional” Project Management while making realistic accommodations to the demand for spontaneously addressing customer expectations, which are almost always in a state of flux.

Now, compare and contrast the introduction of the Agile/Scrum approach to any analogous initiative from, say, our friends the Asset Managers. What would Agile/Scrum Finance and Accounting look like? What tenets of Generally Accepted Accounting Principles (GAAP) would be modified or abandoned, in order to, say, deliver the Profit and Loss Statement earlier? By definition this can’t happen, as the accounting cycle is almost always set up in such a way as to make it impossible to compress. The Asset Managers can, say, process travel reimbursements more expeditiously, but they literally cannot “close the books” sooner than the last day of the accounting period, usually monthly.

What About Ceiling-Fan-Struck Insects Being Retrieved By A Family Dog?

I was just getting back to that. Once the various government-held starter pistols that signal a reprieve from quarantine begin sounding, some things will remain relatively stable – an organization’s asset portfolio, for example. Other things can be expected to change dramatically, e.g., the customer base, which is, by definition, entirely within the purview of the PMs to retain, lose, or expand. There’s really no telling what set of circumstances will lead to an unexpected opportunity suddenly becoming available in bang-bang-bang fashion, but these things do happen. As highly structured as the Asset and Strategic Managers can be, they can’t be counted on to be as agile (get it?) as PMs to respond fast enough to secure or expand the customer base, once things get back to some semblance of normalcy. In short, when the restrictions are lifted, and the business world gets back to opportunities happening in bang-bang-bang fashion, it’s the Project Managers who will swoop in from seemingly nowhere to seize them, and then go off and work them.

Just ignore that crunching sound coming out of the back yard.

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