Game Theory in Management

Hatfield’s Rule of Management Number Ten is that in order for a piece of management information to be of any value, it must be timely, accurate, and relevant. If it is not all of these three things, it’s not only useless, it’s hurting your organization. But where quantifiable criterion for information’s timeliness or accuracy can be developed and used, solid bases for evaluating relevancy is a trickier matter, and yet a business analysis issue that the PMO must get right, or risk the organization’s own relevancy.

Does Relevancy Even Matter In Pick-Up Lines?

Take, for example, one of my favorite targets for the irrelevant label, the comparing of budgets to actual costs. This has value only in the asset management arena, specifically:

• Depreciation, and
• When performing an analysis of how accurate your estimates are

… and that’s it. However, since such a comparison is a critical part of managing a household budget, a natural assumption is that it’s important to evaluating project performance. It’s not, and a simple thought exercise can demonstrate this clearly.

Suppose a $100,000 (USD) construction project. To keep it simple, let’s assume that the original estimate included $75,000 in labor costs, and $25,000 in heavy equipment. At the end of the project, the final costs were $20,000 in labor costs, and $70,000 in heavy equipment. According to the “analysis” of comparing budgets to actual costs by category, this represents a monumental failure, even though the project came in under budget by 10%! Further, for each reporting period that this analysis was performed the resulting information was inaccurate inasmuch as it portrayed a performance issue with the work.

It Actually Gets Worse

This technique can be critically wrong in the opposite direction, as well. Let’s say our $100K project was actually spending at the 75%/25% split of labor-to-equipment at the 2/3rds-spent point of the project (i.e., $49,500 in labor, $16,500 in equipment), but the project is only half-complete. The comparison of the budget to actual costs by category (or even at the line-item level) indicates no problem, when even a simple earned value analysis would readily indicate that the project is on a path to a $32,000 overrun.  A broken clock, as they say, is right twice a day, but comparing budgets to actual costs, even at a detailed level, is right only by coincidence. It’s far more likely to be profoundly wrong, indicating problems where none exist, and portraying smooth sailing when the project is in deep trouble. If there were a toolbox of the exact opposite of valid Business Analysis techniques, then comparing the budgets to actual costs (no matter the level) would have to be near the very top of the set. Yet, I can almost guarantee that the majority of PMOs will engage in this form of analysis, and treat the illusory variances as if they were legitimate cause for concern.

The problem is actually worse than even this. Management Information Systems require time, effort, and money to design, set up, and maintain. Another quick thought exercise: why would any manager pay for information that’s already readily available? Obviously they will only spend money and staff time chasing information streams (a) that are not already available, and (b) that they are convinced are relevant. It follows, then, that should those resources pursue irrelevant information, they do so at the expense of the relevant info streams – a prime example of opportunity costs. For example, your business analysts can be assigned to either set up a basic earned value system for the projects in the portfolio, or else you can ask them to perform whatever skullduggery they need to do to uncover the zodiac signs of the competitor’s project managers. A comically extreme example, to be sure, but irrelevant is irrelevant, and having your business analysts pore over projects’ initial baseline estimates, line item by line item, and compare them to the actual project costs in the general ledger, again, line item by line item, is just as futile (if not more so, since it’s not inevitable that knowing the competition’s zodiac signs will lead to a singularly erroneous conclusion the same way that the budgets-to-actuals comparison will).

You Didn’t End Up Marrying That Person, Did You?

The budgets versus actual costs at the line-item level comparison is not only common, but I know of at least one PM guidance-generating organization that mandates it. If your organization is committed to this silliness, it’s committed, and that’s unfortunate, since there’s no telling what other irrelevancies they have embraced. But, if that’s the game being played, perhaps you can convince them to stop performing that particular analysis by asserting that a Feng Shui expert has established it’s damaging to the organization’s invisible forces.

We humans analyze a lot of things – our preferred modes of transportation, clothing, and the various technical approaches we take to bring our projects in on-time, on-budget. Of course, the way we analyze these things can (and does) have potential difficulties; hence the thankfully short-lived popularity of the AMC Pacer, bell-bottom jeans, and a plethora of business analysis techniques of questionable utility that have somehow crept into the PM codex.

Duct Tape Won’t Fix That

I appreciate the need to perform business analysis well. With the majority of companies in a wide variety of industries operating with as little as a 3% profit margin, any insight that can be gleaned from the available data might be the difference between survival and bankruptcy for quite a lot of managers in general, and Project Managers in particular. The problem is getting at those insights, at knowing what kinds of data to collect, how to process it into usable information, and which decisions are indicated from accurate, timely, and (most of all) relevant information. These are all very fluid parameters, varying from industry to industry, and project to project. The inventory control and reordering advances that made Walmart a giant in retail would have little to no effect on your typical software developing company, much as Carnegie Melon University’s Capability Maturity Model would not be expected to provide insights on getting ahead in retail.  The specific tools that help in one type of project aren’t necessarily useful in another, while, at the other end of the extreme, notions that are so general as to be accurate across industries (e.g., “work hard, and treat customers well”) are rendered cliché. What’s a business analyst to do?

Let’s start by defining which type of management we’re talking about here. As my regular readers know, there are three types of management, Asset, Project, and Strategic, with different objectives and tools used to attain them. Since this is a Project Management blog, I’ll jump right in to PM, with the caveat that it’s absolutely necessary to discard the tools belonging to the other types. As a PM, calculating an asset’s return on investment (ROI) does nothing for me but waste my time (and don’t get me started on those who attempt to compute ROI on things like a project team – the epistemological equivalent of having a 16^th century apothecary fill your prescription for Amoxicillin).

Neither Will Crystal Balls or Tea Leaves

Within the realm of PM, the next crucial question is: what is it, generally speaking, that you want to know? Everyone wants to know the future. Business Analysts get that. But the future cannot be known, or quantified, no matter how fancy the Gaussian Curve-overusers’ (also known as risk managers) formulae appear to be. All management information systems that attempt to capture the future are known as “feed-forward,” and depend on highly subjective data. And just so we’re clear – by “highly subjective data,” we’re talking about somebody’s prejudices, or guesses. Feed-forward systems are notoriously unreliable, again, no matter how much statistical jargon is used to convey their “results.”

For the Project Manager, then, the best available information is based on feed-back systems; and, in the PM world, this information comes from the analysis methods of Earned Value and Critical Path. Each system is based on known facts – objective data – but can deliver a remarkably accurate picture of the future. This is because these methods return the project team’s performance, and in rather stark terms. Using estimate-at-completion formulae (Earned Value) and recalculating the project’s status file (Critical Path), these systems can return the total project cost and completion date, almost always within 10%, and often even more accurately.

Dogs or Cats, Though…

Indeed, Earned Value and Critical Path methods are the dogs of the business analysis world. They’re reliable, relatively inexpensive to obtain and maintain, and provide many benefits, all while being very happy to just be a part of the project team. Risk management, and other feed-forward, subjective data-based systems, on the other hand, are the cats of the business analysis universe. They’re the very picture of unreliability, and yet through a bizarre appeal to the intellect, have been accepted at a level equal to (or even higher than) dogs. They are high-maintenance, and carry an air of being superior to the other elements of the project team, even though they are demonstrably unable to make any real contributions to the end goals of the organization.

So, the overarching business analysis question is much like the preferred pet quandary, with a similar optimal solution. Go with the dog, and ignore (or even get rid of) the cat –it ignores you, after all.

As I’ve laid out in this month’s previous blogs, Strategic Management is the art of acquiring more market share, whereas Project Management is the science of executing project work so as to bring the effort in on-time, on-budget, and meeting all customer expectations concerning scope. And Asset Management is, well, just that (how previous business scholars have sold the management science world that it’s all about them is beyond me). Some so-called experts will assert that Strategic Management is just one more rung up the scalability ladder of PM, as in Project-to-Program-to-Portfolio-to-Strategic, but this is false, to an extent. Let me explain.

A strategic plan is an overarching structure, used to organize the more specific tactics. For example, if your strategy is to gain more market share by attracting more clients while keeping the ones you have satisfied, then the following tactics are called for:

• Create a product/project management office, or PMO (if you don’t have one already)
• Attract talented workers
• …while getting rid of the pretenders (need help identifying the real PM-types from these pretenders? I’ll take that up in subsequent blogs).
• Place a priority on the training budgets of the valid PM types.
• Develop a feedback communication stream from your customers (Customers, not “stakeholders,” no matter what your communications experts say).
• Ignore the accountants and risk managers. They do not help with this strategy.

Conversely, if you are given to taking recreational drugs while executing the duties of a Chief Executive Officer of an unfortunate organization, and have selected a strategy that calls for wasting resources while transferring the costs to your soon-to-be-ex customers under the guise of legitimate project management, then the following tactics are in order:

• Bring in high-level risk managers and analysts, and have them crawl over every aspect of the cost and schedule baselines. Insist on thorough documentation of their analyses, to include a risk management plan, risk register, Monte Carlo analysis, and the complete set of assumptions that gets you to an 80% confidence interval on the baselines.
• Hire communications experts, and have them “engage stakeholders.”
• Don’t forget the quality analysts, and their infernal fishbone diagrams with a “branch” for every activity in the WBS that could have been planned differently.
• Ask the risk managers to perform an analysis on having the quality people do the Hasegawa Diagram on each of the lowest-level items in the WBS index.
• Have the quality experts perform an analysis on the methods employed by the risk managers.
• Assign each of the previous two bullets their own Work Packages, and schedule their activities. Have your project controllers/schedulers ping them at the end of each month for their percent complete estimates.
• Arrange to have the risk managers and quality control specialists present their pre-kickoff findings at the same meeting. Sell tickets to help offset project costs.
• Arrange to have the communications specialists attend as well. Prep them by reminding them that all stakeholders’ opinions have value, and must not be shouted down or categorically rejected,
• …particularly when the other members of the Project Team tell the communications specialists that their ideas have no value, and should be categorically rejected.

The beauty of this approach is that, in those instances where your customer is convinced of the efficacy of risk, quality, and communication management practices, the fact that these members of the Project Team will probably be shouting at each other will only serve to support the notion that the appropriate level of (wasted) energy is being devoted to each of these approaches, and that the project in question is being “properly” managed. But as a way of increasing market share – i.e., Strategic Initiative Management – it’s not going to work.

No matter how much twisted fun it may be to see unfold.

In the last couple of blogs I’ve laid out a few basic concepts, namely that the fuzzy-languaged pieces on this topic aren’t worth reading, how to identify them early on so you don’t have to waste your time, and some distinctions on what Strategic Management is not, as well as what it is. The short answer: Strategic Management is centered on those things the organization must do to capture more market share than the competition. Strategic Initiative Management (SIM), then, is the selection of those projects or initiatives that are aimed at capturing more market share, and managing them. It really is that simple, at this level; however, as with most things managerial, the actual execution gets rather complex.

First, Know What She Hates

Whether you are discovering or introducing a new market, or attempting to advance within a given one, the key word here is initiative. The fairy Market Share does not flit into your board room unbidden, and she absolutely loathes your Chief Financial Officer. Why? As I pointed out in my last blog, the overarching theme of Asset Managers everywhere, “maximize shareholder wealth,” is anathema to her. The accountants’ favorite formula, calculating the Return on Investment, or ROI, is already soaked in speculation (though the accountants will never admit as such). But to try to assess the return on, say, an advertising campaign is so subjective as to be practically impossible. All things being equal, however, some sort of marketing campaign is a real difference-maker – hence the money that pours into Madison Avenue, and the capital that brings favorite shows and football games into our living rooms.

Many project-based organizations do not advertise, or engage in anything but the most token marketing campaigns. Why? Because their customers are not the populace at large; they are, rather, those people who make decisions in organizations that build or procure things on a large scale. Oh, they’ll air the occasional television commercial to keep their brand out there – Boeing® has an ad that comes to mind – but even here it’s not about claims to the superiority of their products, but to keep their name familiar to most. So, how do companies that do not advertise in mass market mediums go about acquiring more market share?

Then Find Out What She Loves

If you said via superior Project Management, go to the head of the class. Yes, I know most contracts traditionally go to the lowest bidder (the governments of the world are also afflicted by Asset Managers). But when it comes to capturing more market share, the absolute worst thing the CEO can do is to attempt to “maximize shareholder wealth.” The customers of this world don’t care to make your shareholders wealthy. They want to receive their goods and services at the best price for the quality they expect, and the health of the profit and loss statement of the organizations they do business with is absolutely not a concern. So, which type of management was it, again, that’s centered on delivering goods and services within the customers’ expectations of scope, cost, and schedule?

But here’s an added twist: when the best applications of Project Management techniques become laden down with irrelevant factors, the price of PM goes up, making it less efficient and less effective. An example: I am unaware of any major project that can point to its use of a risk management system or analysis technique as a material cause of its eventual success. Now, I’m fully aware that, in almost every failed project, it’s fairly easy to place blame. It is, however, more difficult to accurately identify the causal factors that led to such failures. How easy it is, though, to simply state that the cause of a given project’s failure is “unforeseen circumstances?” Indeed, that could be the cause for all failures of human endeavor. So, what’s the fix for “unforeseen circumstances?” Well, to foresee them, of course! Cue the statisticians! They can quantify the future with decision tree or Monte Carlo simulations rolling out the probability of bad things happening, right?

Stop laughing. Risk management is a multi-billion dollar industry world-wide, and yet its shaky foundation is based on this very narrative. You may as well be trying to attract the Market Share fairy by using a large, steaming plate of haggis as bait. And by no means are the RM-types alone here: several different pseudo-management science practitioners have inserted their own version of alchemy into the PM mix, threatening its overall acceptance and validity. These don’t improve your project management capability – they just make your organization more hidebound (and irksome).

And Before You Know It, They’re Like Hummingbirds Fighting Over A Feeder

 Look, if your organization can execute its projects well and efficiently, while taking advantage of appropriate marketing opportunities, the team will be in an optimal position to attract market share. It’s impossible to say that these increases will come, due to the myriad unforeseen circumstances (the so-called unknown unkowns) that are present in all free-market environs.

But there can be no doubt that giving short shrift to “shareholder wealth,” and focusing on project sponsor satisfaction is a superior approach.

In my last blog I promised a “cohesive, articulable structure to address superior strategic initiative management ideas,” and I fully intend to do so. But first I need to cut through some of the fuzzy language associated with concepts such as “strategic initiative management,” and I will do so by pointing out what strategic management is not.

As I have often stated previously, Strategic Management is one of three distinct types of management, the others being Asset Management and (of course) Project Management. Each of these types has different goals, methods, and information streams needed to achieve those goals. As far as I know, I’m the only business writer to assert such a structure. So, how do I know that this assertion is valid? Here’s how.

Asset Management =

Asset management seeks to maximize shareholder wealth, and its primary information stream comes from the general ledger. I know this because that’s what they drilled into my skull in graduate school.

Project Management =

Project management seeks to deliver project work under the customers’ expectations/contract parameters of scope, cost, and schedule. Its primary information feed comes from reports generated via Earned Value and Critical Path methodologies. I know this because of decades working in the industry, three books authored and hundreds of columns, articles, and blogs, plus my three PM-centered professional certifications.

Strategic Management =

Strategic management is all about gaining market share, either by establishing new markets or out-competing your competition in existing ones. Strategic management’s information streams tend to be less objective, and more predicated on market analysis and polls.

Okay, so how do I know these are distinct types, and not mere gradations of the huge body of management science codex? Here’s how.

Asset Management ≠ Strategic Management

Asset Management is provably different from Strategic Management due to corporate behavior during hostile takeovers. A hostile takeover occurs when one company buys up the competitor’s shares – at inflated prices – in order to gain a majority ownership and force the company to liquidate. The acquiring company almost always incurs great expense to even attempt this tactic, and the target company’s shares jump in value; however, from a Strategic point of view, it’s worth it to eliminate the competitor, i.e. gain market share. Recall the objective of the Asset Manager, to maximize shareholder wealth. If Asset and Strategic Management were simpatico, then no acquiring company would ever attempt it, since shareholder wealth is (temporarily, with luck) driven down, and no targeted company would resist, because their shareholder wealth increases, usually significantly. The fact that acquiring companies attempt this tactic regularly, and targeted companies resist, proves that Asset and Strategic Management are different in type.

Strategic Management ≠ Project Management

Strategic Management is notably different from Project Management from observations of how monopolies work. Monopolies – for a variety of reasons – have no competition in their particular markets, and are therefor under little (or no) compunction to even attempt to meet customer expectations. But in those instances where their monopoly basis suddenly goes away, their behaviors change dramatically. Think the performance of cable television after satellite television became widely available, the “Baby Bells” telephone companies when cell phones came along, or government-run department of motor vehicles after licensed, private providers are allowed in to the market. Clearly, if market share is not an issue, they couldn’t care less about the customers’ expectations of scope, cost, and schedule, proving that Strategic and Project Management are different in type.

Project Management ≠ Asset Management

Project Management is provably different in type from Asset Management in that the information streams are irrelevant one to the other. Your typical PM doesn’t care whether the copier is purchased or leased, and your accountant is completely unaware of the schedule variance on a given project. As stated previously, Asset Management is all about return on investment, whereas Project Management is about delivering scope, on-time and within budget constraints.

With these definitions as the foundation, the structure of Strategic Initiative Management…

…will have to wait until next week, as I am out of room. Besides, did anyone really expect a fair addressing of the subject to fit inside 800 words?