Game Theory in Management

Yes, you read that right.

No, I’m not being reflexively iconoclastic, nor am I venting again about the overuse of clichés in business writing.

But here’s the thing about experienced Project Managers: projects are, by definition, one-off efforts. Of course, they are often similar to other projects, sometimes almost identically so. I also readily concede that many universal tactics, strategies and approaches are reliable, and should be employed. Experienced PMs often have a rather extensive array of technical approaches to their work assignments, and are usually right in their selections of said tech approaches. So, what’s the problem here, exactly?

Black swans. Black swans are the problem.

As originally articulated by Nassim Taleb in his best-selling book of the same name[i], a Black Swan event is one that has the following characteristics:

• It is unexpected and unpredictable,
• It has a significant impact, and
• After it has occurred, it’s almost universal human nature to believe that it could have been predicted, or at least planned for or mitigated.

The term gets its name from the discovery of black swans in Australia by the Dutch in 1697. Prior to that discovery, had you asked anybody in the world (outside of Australia) what color were swans, they would say “white,” since that was the only color of swans ever encountered. Had you pressed them further in this zoology quiz of 1696, and asked “Are you sure there are no orange, purple, green, or black swans?”, the answer would have been “Of course not.”

These types of events happen all the time, and projects are particularly susceptible to them, since they are, again by definition, novel. This being the case, the best PMs would be those who are able to have the most robust response to the unpredictable events that occur to the project, events that are not necessarily addressed by one of the canned strategies in that particular PM’s experience. Conversely, the worst PMs are going to be among the most experienced, who, nevertheless, cling to strategies that had worked on semi-analogous projects in the past, even when those strategies are clearly failing. In these cases the PMs' experience is actually working against them. They can easily become convinced that it’s not the technical approach to the unexpected problem that’s failing, but the Project Team’s reluctance to accept the flawed approach, or some other organizational factor (here we often hear of “cultural” issues, or “resistance to change”). As the repeatedly failed strategy is employed over and over again, the Project Team becomes less willing to execute it, reinforcing the PM’s notion that it’s the fault of the team and not the strategy. I’ve seen this tailspin ruin many a project.

As if that wasn’t bad enough, PMs have to deal with a factor they may not have heard of (unless they read my books or this blog), that of Metcalf’s Law. In short, Metcalf’s Law is the basis for much of Network Theory, with its main offshoot being the notion that very small variances in some nodes in an extensive network can have a cascading effect and deliver substantial, or even catastrophic impacts on other nodes, or even the entire network. It’s also known as the Butterfly Effect, encapsulated by the question “If a butterfly flaps its wings in Brazil, does it cause a hurricane in Texas?” Like Black Swan events, they are both significant in consequence, and utterly unpredictable.

Here’s where the risk managers come in. If they were to be completely intellectually honest, they would admit that what they are doing is monetizing the fear that PMs have of encountering Black Swan events, or being caught flat-footed by a cascading impact that began as a small perturbation. Consider also one of the main tools used in modern risk analysis, the generation of ordinal scales. Often presented as a grid, with an estimate of the probability of a given future event on one axis and its “impact” on the other, ordinal scales are obviously based on the experience of the analysts filling it out. Not only is personal experience highly variable from one risk analyst to the next, but memory is also inconstant. We tend to remember things we like to remember, and forget those that we don’t, even if those experiences have a direct bearing on the accuracy of the experienced-based risk assessment grid.

By overworking analyses based on Gaussian Curves, risk managers provide … well, what, exactly? Because generating stochastic ranges on things that might happen with their associated estimated impacts does absolutely nothing to stave off either scenario. It’s simply a reflection of what the experience of the risk analysts leads them to assert what they think the PM ought to worry about.

Essentially, the canny PM will know that experience isn’t always the best teacher. In fact, it’s often not even a friend.

[i] Taleb, Nassim Nicholas, The Black Swan; The Impact of the Highly Improbable, Random House, 2007.

During my recent vacation, I was in a large Museum of Art located on a major University’s campus. More than one of the pieces on display was, essentially, a blank canvas. When I read its description plate, the verbiage began “While this may appear to be merely a blank canvas, it is actually…”

That’s when I stopped reading. It was a blank canvas, and no fifty-word assemblage on a brass plate was going to convince me otherwise. But there it was, hanging in a prominent place in an otherwise reputable gallery. I’m sure my experience is not unique – what is currently praised as art would not have passed for practical jokes 500 years ago (“Hey, guys, did you see that blank canvas Rembrandt revealed the other day? Isn’t he a gas?”).

But that’s the thing with art – it’s virtually impossible to define it in such a way as to encompass all that claims to belong to it, kind of like listening to risk analysts attempt to define what all is involved in risk management.

Science, on the other hand, is easy to clearly define. It’s the method by which theories are overturned or affirmed by repeatable, observable phenomena, preferably via reproducible experiments in a laboratory setting. Exhibit A has to be a piece (get it?) that award-winning economist Paul Krugman wrote in the New York Times on the topic of when the stock markets would recover from the 2016 United States Presidential election, saying “If the question is when markets will recover, a first-pass answer is never.”[i]

Oooops. I guess that wasn’t a very good example of successful Management Science based on projections stemming from verified theory (or even a half-baked guess), since in the 12 months following the 2016 election the markets added 35% to their value. Indeed, if we cut Mr. Krugman a bit of slack, and, by “never recovering” he meant a 5% retreat that stayed there, then his “never” scenario was off by a whopping 40 points within a year of his analysis. In contrast, the old PM device of predicting the future, of calculating the Estimate at Completion by dividing the Cost Performance Index (CPI) into the Budget at Completion (BAC), has been shown to be accurate to within 10 points. In other words, the lowliest Project Controls analyst is wayyy better at predicting the future than award-winning economists, which, I suppose, points to the vastly more truly scientific nature of PM over modern economics.

While Mr. Krugman’s analysis probably should not be used to make financial decisions, it is an excellent example of the kind of silliness that passes for usable Management Science, and this silliness isn’t confined to the New York Times. It’s all around us, and Project Management isn’t exempt. But, as in economics, it’s possible to push out volumes of documents and guidance that has no basis in actual scientific findings and still receive accolades from the community at large. Ah, but that’s where the “art” aspect of PM comes in. Think of Project Management as the generator of an information stream, one that feeds basic business needs (cost and schedule performance), but also fuels irrelevant or extraneous curiosities (the difference in contingency budget dollars between the 80% and 90% confidence intervals). Like art, those who imbibe in this information stream will develop their preferences for the kinds of data they believe to be crucial, must-have elements, and those they can do without. And all that’s okay by me. It’s only when third-party “experts” weigh in that the silliness proliferates.

Let’s go back to the art museum. There were several rooms in the galleries that featured works that would inspire people walking into that particular room to stop and exclaim how beautiful was the piece they were observing. I hung around the blank canvas room for a few minutes to conduct my own little survey. Nobody – nobody ­­– commented on how lovely the blank canvases were. They were, at best, curiosities. People wondered aloud how they came to be considered works of art in the first place. So, why were they there? I believe it's because a third party – neither the artist nor a person who saw the work and thought “Wow! This belongs in our museum!” – thought that paying museum customers ought to think of the work as, well, art.

Which returns us to the art of Project Management. When actual PMs select the information products they prefer to increase their odds of bringing in their projects on-time, on-budget, they communicate to the community at large which information streams are essential, and which are extraneous. It’s when third parties, those who do not pay for nor generate the information streams themselves, nor are they on the hook for completing work successfully, weigh in to inform everybody what they ought to use that quackery proliferates.

Put another way, I wonder if risk managers have framed blank canvases hanging on the walls of their homes.

[i] Krugman, Paul, “The Economic Fallout,” retrieved from https://www.nytimes.com/interactive/projects/cp/opinion/election-night-2016/paul-krugman-the-economic-fallout on August 20, 2018, 14:42 MDT.

Since my undergraduate degree is in English, and I have a particular affinity to the works attributed to William Shakespeare, I was somewhat taken aback to learn that the phrase “hoist with his own petard” originated in Hamlet (Act 3, Scene 4, the “Closet Scene”). In this particular case of ironic reversal, Hamlet is referring to the scheme between Claudius, Rosencrantz, and Guildenstern to have him murdered during a trip to England. I used to believe that it meant to be hung with the noose that the schemer had tied for someone else; in fact, it means to be blown up by a bomb created by the bomb-maker himself. In a play full of ironic reversals (Laertes is killed by the saber he himself had poisoned; Claudius is forced to drink the poisoned chalice he had intended Hamlet to drink, among others) this particular reversal remains ensconced in modern English idiom; even those who have no idea what the archaic meaning of “hoist,” or any idea at all what a “petard” is (or was) knows the meaning of the phrase. That is, perhaps everyone except Project Managers.

Not all PMs, to be sure, but a dangerous percentage. My regular readers know that I’ve spent considerable computer pixel-ink on the perniciousness of Processors, those claiming membership within the PM community who are more interested in making project teams obey what they consider the right way of doing PM, as opposed to Producers, who simply bring their projects in on-time, on-budget. The Producers know, often intuitively, that even simple Earned Value and Critical Path systems can produce extremely valuable cost and schedule performance information, information without which their jobs become extraordinarily difficult. Ah, but there’s the rub, as the melancholy Prince of Denmark might say. Processors know this too, but have no intention of allowing the notion that simplified systems will still deliver powerful information streams to become commonly accepted. No siree, these Processors are out to make a buck on their idle musings, and want the Producers to be the ones to pay.

The strategy to monetize their flawed business models is as familiar as it is transparent. They set up an approach similar to the jaws of a vice. The first premise is one that’s indisputably true: to track cost and schedule performance on project work, the Earned Value and Critical Path methodologies are irreplaceable. Projects that had eschewed these methodologies early in the project cycle ended up failing spectacularly, and remain as cautionary tales for any major project’s manager who believes himself to be so advanced as to not need such traditional tools. Critical Path and (especially) Earned Value are simply indispensable, and any PM claiming to the contrary is going to experience a major PM debacle. Oh, maybe not the very next project, or the one after that. But, sooner or later, it will happen.

The other jaw of this vice is where the Processors come in. You see, Earned Value is really a very simple concept. By placing a value on how much of the projects’ budget has been actually accomplished, or “earned,” much valuable information can be gleaned. In fact, the calculated Estimate at Completion (EAC), arguably the most valuable piece of Project Management information out there, can be accurately and reliably derived from two parameters: cumulative percent complete, and cumulative actual costs. That’s right: divide the former into the latter, and you have an estimate that’s been shown to be consistently accurate to within ten points of the real at-completion costs. Something similar happens in forecasting when the project will finish, based on performance. Divide the percent complete figure into cumulative duration, and you have a reliable estimate on total duration. It really is that simple.

“Not so!” claim the Processors. They will insist on a long list of both marginally and completely superfluous data collection and analysis techniques, such as:

• The time-phased budget must be derived using up-to-date resource dictionaries.
• Ditto for the Basis of Estimate.
• Variance Analysis Thresholds must be set tightly, as tight as possible.
• Ditto for Change Control Thresholds.
• Did I mention Change Control? The members of the Change Control Board must be highly educated and diverse stakeholders, some of whom probably hate your project.
• Time-phased Estimates to Complete, comparing the original Basis of Estimate to the actual costs on a line-item basis, “bottoms-up” Estimates at Completion…
• And don’t get me (re-) started on risk management.

I could go on (and often do), but you see my point. The second jaw of the vice, that of an overly-complex EV system being required, because, well, reasons, is pushing the whole concept of setting up and operating such systems into insufferable, if not intolerable territory. Already Earned Value is being slandered with a reputation of being so difficult and onerous to use that the newbies in the PM world avoid it like it’s a curse.

And here’s the ironic twist: many self-identified “experts” within the community are the ones larding up these Management Information Systems with the unnecessary requirements that make them less likely to be widely accepted, or employed. I would normally make some plea here, along the lines of “Hey, guys, we’re doing this to ourselves,” except for the fact that that’s not entirely accurate. The Processors are doing it to the Producers. Maybe it’s a sort-of payback for all that success that the Producers produce, while laughing at the Processors behind their backs.

Just keep in mind, you Processors: Fortinbras doesn’t know nor care about the subtleties or murderous machinations of the Danish Royal Court, and yet he’s the one crowned king at the end of the play.

And very few of the rest of them had a happy ending.

A few weeks ago I wrote about the main corollary stemming from the Triple Constraint/Iron Triangle (the familiar PM concept that Scope = Cost = Schedule, and you can’t change one without changing the other two). This corollary asserts that among the product/service characteristics of affordability, availability, and quality, the customer should expect/pick any two. In other words,

• High-quality, affordable goods or services will require a wait;
• High-quality goods available immediately will be expensive, and
• Readily available, affordable goods won’t be of the highest quality.

This corollary is axiomatic among seasoned practitioners; in fact, ignorance of this effect is a “tell” that the person you’re dealing with isn’t very advanced in the PM sciences.

I want to combine this axiom with another established theory from economics, and I believe the combination will reveal some rather interesting insights. The combine-ee is the notion of how first, second, and third-hand purchasers change the nature of the industry supplying any given good or service. A first-hand purchaser is a person who is buying something for themselves. They seek out the vendor who matches most or all of their parameters, and perform the purchase themselves. A second-hand purchaser is someone who is buying something for another person, as in a gift. They often don’t know all of the intended recipients’ expectations in-depth, and will usually have a budget figure in mind that the intended recipient may or may not have been willing to spend.

Here's where it gets interesting. A third-party purchaser is buying something for another person, but not using their own money. Nassim Taleb’s recent book Skin In The Game addresses this phenomena, and is worth reading. An essential take-away is that, if you don’t have a direct interest in, this case, the way a management information system (MIS) should be designed and implemented, you shouldn’t weigh in. At all. My take is that such ones are so removed from the first-party purchasers’ model that any assertion or decision they make is bound to be flawed, and lead to poor management decisions.

Now, let’s combine these two truisms of affordability-availability-quality, and third-person purchaser limitations, and see what they yield in Project Management space. Let’s say you are the director of a PMO of a medium-to-large company, and the PM for a recently-won project comes to you for project management-type support. The canny PMO Director will ascertain the PM’s inclinations with regards to the availability, affordability, and relative quality of the support sought, and seek to accommodate these parameters. Conversely, the moribund PMO Director will have already decided the level of “quality” that the PM ought to have requested, leaving the only negotiating points the price and availability. Since most PMs will need their Critical Path and Earned Value systems in-place at the project’s start date, these PMO Directors will assume that their erstwhile clients will be compelled to purchase such support at whatever price point the PMO Director stipulates. This is how PM is sent backwards within industry, and at warp speed.

Consider what happens in second-party PM support scenarios. The PM of the new work goes to the PMO Director for support, but the level of PM rigor has already been established by the organization, usually through procedures. Hopefully, this level of rigor was placed into the Basis of Estimate in the project’s proposal, which means that the level of affordability, availability, and quality has already been established. So, no issues here, unless the new work isn’t entirely consistent with the other projects within the portfolio. Presumably, if the pre-determined level of rigor was too expensive, the proposal would not have won in the first place.

Now we come to the third-party option, and it’s not pretty. In those instances where some “stakeholder” places themselves into a position where they can demand a higher level of PM information system rigor, while they neither pay for such an increase, nor are they the ultimate recipients of the successful completion of the scope of the project, the opportunities for quackery increase exponentially. Assuming a position of PM authority or expertise, these people are in a position to damage both the suppliers’ ability to meet the clients’ expectations, and the latitude that the clients have in selecting contractors who meet their specific mix of availability, affordability, and quality. Since most contractors work on a Cost Plus Fixed Fee/Award Fee, or even Firm Fixed Price basis, the Affordability parameter has already been fixed. The Availability issue has already been established as well, since the cost and schedule baselines are typically fixed at the point of contract award. This leaves only the level of PM rigor which, if we are to observe the Triple Constraint, must remain consistent with the other particulars of the project. “Not so!”, say those “guidance”-generating organizations that like to assert their “expertise” in the PM industry. All major projects must perform analyses that the contractor PMs did not originally intend to provide, nor which their customers wanted in the first place. To do otherwise is to commit some inchoate sin against the purity of Project Management!

I find it fascinating that these guidance-generating organizations against whom I often rail never seem to publish documents calling for more affordable, or more available PM information systems. It’s always the same old thing, about how everyone needs to slather on the irrelevant Management Information System lard, like comparing basis of estimate to actual costs at the line-item level, time-phasing the Estimate to Complete, or performing Monte Carlo risk assessments. In fact, if you are involved in having to provide any of these analyses, I already know something about your project. It was either not competitively let, or else there are third-party stakeholders asserting some level of control over the PM information systems.

Forced to do useless things in PM space? Blame the Processors entrenched in the guidance-generating industry.

Do you remember the scene from The Wizard of Oz (1939) where the Tin Man, Scarecrow, and Cowardly Lion (and Toto, too!) have crept up on the Wicked Witch’s castle, and watch her guards march about the front gate, in formation? They are singing/chanting, but for the longest time I had no idea what they were saying. They are actually repeating the words in this blog’s title, over and over, using only two notes and a militaristic drum score which adds dramatically to the creepy motif of the castle. Only after Dorothy accidentally dissolves the Wicked Witch do we discover that this “love” that the guards have for “the old one” wasn’t so deep after all. In fact, the guards appear almost joyous when they realize the Witch is gone, which kind of makes one wonder whose idea it was for them to sing those words, over and over, in the first place. My guess would be “upper management.”

Meanwhile, Back In The Project Management World…

I wanted to save this organizational culture-related subject, the darkest of this month’s theme set, for last. It’s highly relevant, though, since, while it won’t have a current impact on all of my readers, I can safely assert that all of my readers, at one time or another, has dealt or will deal with this topic. No, it’s not how to ward off flying monkeys (actually, come to think of it, it is about that – more in a minute). Rather, it’s how to get by in those times you find yourself in a highly toxic organizational culture, and a well-placed bucket-load of water won’t dissolve all of the toxicity generators.

We’ve all either been there, or will be there, or both. Let me start by stipulating that a toxic organizational culture is NOT one where you disagree with your boss or coworkers, or think that you should be receiving more compensation or respect. By that definition, every organization out there is toxic. Some of the indicators of a genuinely toxic organizational culture are:

• The organization is not a meritocracy, as evidenced by cronyism, nepotism, or clan-ish behavior. The most talented don’t advance, only the best connected.
• Managers allow ex parte conversations. Ex parte conversations are strictly disallowed in the legal professions, since, if the judge is listening to only one side of an argument without opposing counsel present for rebuttal (or even evaluation), then one version of a narrative is being advanced at the expense of the other, and the truth is rarely achieved by such means. Management is no different in those instances where ideas or personnel are competing for acceptance. If certain people or ideas are being advanced on, say, the golf course, you might work for an organization with a toxic culture.
• Based on my previous descriptions of the Maccoby archetypes (or even directly from his book The Gamesman), take a copy of your organization’s org chart, and next to each name place a “C” (Craftsman), “G” (Gamesman), “M” (Company Man), or “J” (Jungle Fighter). If you end up with a bunch of “J”s, or even one “J” overseeing a lot of “M”s, you are probably in a toxic organization.

The best remedy, of course, is to find another position with an organization that shows none of these characteristics. Realistically, that’s often not an option, and the PM professional needs to make the best of a toxic situation. Here’s where it gets tricky, since there’s a right way and a wrong way of surviving a toxic organizational culture, and to make this distinction clear we have to return to the Wicked Witch’s castle, and our old, creepy friends, the Flying Monkeys.

Creepy in the movie, and not much better in real life.

The term “Flying Monkeys,” in psychology, refers to those people who are associated with narcissists, and help them advance their nefarious agendas through tactics that are strongly associated with the Jungle Fighter Maccoby archetype. I’m going to stick with the Maccoby archetype here, rather than speculate along psychological lines, since Maccoby made observations about people’s observable behavior, and observable behavior is the sole basis for furthering organizational behavior and performance theory.

So, when you find yourself in a toxic organizational culture, you must not only deal with the Jungle Fighter execs themselves, but with their “Flying Monkeys.” To do so, let’s start by considering the four archetypes displayed by members of a dysfunctional family:

• The Golden Child is clearly the favorite, and gets away with things the others can’t.
• The Mascot enthusiastically supports the family as a whole, and seeks to smooth over conflicts.
• The Lost Child simply seeks to get by with minimal interface with the rest of the family.
• The Scapegoat is blamed, usually unfairly, for the difficulties the family encounters.

Toxic organizational cultures will often display characteristics similar to dysfunctional families, but with some modifications. Let’s evaluate the following payoff grid (Hey! I’m in to Game Theory! We love our payoff grids!):

In the dysfunctional organization, the Golden Child is considered the most loyal and competent, and the Scapegoat is considered least in both categories. In this game of “Escape the Witch’s Castle,” the main goal is to avoid letting the Flying Monkeys put you into the Scapegoat category. The wrong way of doing so is to ensconce yourself in the Mascot category by performing overt displays of loyalty to the Jungle Fighting execs. This is how people get turned into Flying Monkeys. Rather, focus your energies on technical performance and quiet displays of competency, all in order to move towards the Lost Child category. From here you can either wait out the toxic influences within the organization, or use this archetype as a platform from which to move, either to a division within your existing organization that’s not dysfunctional, or out of the macro organization altogether.

If this blog was a bit compressed, or if you would like more information on this particular strategic approach, you might want to check out my ProjectManagement.com webinar on the same topic, here. Alternately, you could come up with an adequate defense against winged Cercopithecidae, though, if an actual lion and a armored man with an axe couldn’t stop them, well…