Game Theory in Management

“Those who know that the consensus of many centuries has sanctioned the conception that the earth remains at rest in the middle of the heavens as its center, would, I reflected, regard it as an insane pronouncement if I made the opposite assertion that the earth moves.”

                                                --Nicolaus Copernicus

I was thrilled when Cameron posted that April’s theme was governance, because I just love railing against the conventional wisdom on this topic. I’m channeling my inner curmudgeon, and he’s had three Red Bulls in the past hour.

First off, I would like to remind my readers of one of my March blogs, Here's a Communication Strategy -- Don't Communicate Your Strategy! In it, I took on the notion that anyone who has even the most tenuous claim to being a “stakeholder” ought to have access to any and all organizational information involving strategy or tactics. Under the eat-your-peas-style axiom that management must “engage stakeholders,” a plethora of dopey business decisions are made based on adherence to this cliché, making the owning organization weaker, not stronger.

Consider what the push towards better corporate “governance” has brought us, at least in the United States: Sarbanes-Oxley, that mish-mash of corporate “guidance” brought to you by the same type of people who are going to “improve” the medical industry via Obamacare. How a given organization’s management interacts with its shareholders (or, by extension, how its board interacts with “stakeholders”) is their business, and no one else’s. I would bet real money that, if successful managers and board members were to be shot full of Sodium Pentothal, and placed in front of stakeholders (and bloggers who insist the latter must be engaged more often and more fully, don’t you know), they may very well blurt out (in unison), “we would realize a lot more success if you guys would just shut up and let us run the organization.”

“But what about Enron?” the pro-governance crowd would insist. Well, what about it? I’m fully aware that that failed organization is the poster-child for the perception that some sort of authority is needed to ensure shareholders’ (yeah, stakeholders’ too) goals are not being subverted by rogue management teams. But, prior to Enron’s spectacular crash-and-burn, what were they doing? As I discuss in my recently-released, must-have book, Game Theory in Management, they were making money hand over fist off of California’s poorly-conceived energy regulatory environment.  I must ask the pro-governance crowd: at what point should Enron’s management stopped the profit meter from spinning at its dizzying pace to “engage stakeholders,” and get their opinions on what they were doing? Immediately prior to the illegal stuff? Well, for one, Enron was not found guilty of anything illegal during the California Energy Crisis run. Two, the point that management veered into error is easy enough to see in hindsight, but a bit trickier in real-time. The latitude of management to make timely decisions based on the market conditions in front of them is severely curtailed by the need for stakeholder consensus, and this curtailment can be detrimental, or even fatal to the organization.

Also consider that much of what passes for proper corporate governance is predicated on the establishment and observation of some sort of consensus derived from all those under-informed stakeholders. It is simply inescapable that many of the organization’s stakeholders are purely passive – they may be shareholders who wouldn’t recognize their own retirement portfolios if they were placed in front of them, yet hold shares in the organization. Should their opinions be culled, and integrated into corporate strategy? They’re stakeholders, in the truest sense, aren’t they? Taken to its logical conclusion, doesn’t the conventional wisdom on proper corporate governance demand that these people’s opinions – ignorant as they are – weigh significantly in the process of developing the organizations’ strategies?

Yeah, I know I’m the minority opinion here; but, like Copernicus, that doesn’t mean I’m wrong.

Of course, a lot of ProjectManagement.com bits have been written about strategic management this month, about what it is, and how it ought to be executed. However, I haven’t seen much about what strategic management isn’t, so I’ll take the plunge:

Strategic management has nothing to do with asset management; therefore, those trained in asset management make poor strategists.

I know this flies in the face of much of what’s currently in textbooks on the subject, but it is undeniably true. When I was taking classes in strategic management, my textbooks appeared to be written by someone who was under the impression that low or mid-level management decided things like how many pencils to buy in a given month, and higher level, or “strategic” management, made decisions about the macro organization’s policy on buying regular or mechanical pencils for everybody. To these guys, strategic management is nothing more than asset management, writ large – and they couldn’t be more wrong.

The reasons they’re wrong are myriad, so I’ll just address the most obvious. Management at all levels and types is about making informed decisions. The source and residence of virtually all of the information your typical Chief Financial Officer (read: asset manager) receives originates exclusively from the general ledger. While the general ledger may be great for passing along things like the depreciation rate of the stuff in your warehouses, it has only one piece of information usable in the project management realm (actual cost of work performed), and absolutely nothing of use in the strategic management realm. As I discuss in my recently-released, must-have book Game Theory in Management, there are three kinds of management:

·         Asset

·         Project

·         Strategic

Asset management enthusiasts – give them credit – successfully inserted into the management science narrative that the point of all management is to “maximize shareholder wealth.” Wrong! That’s the point of asset management, but nothing else. The point of project management is to bring your project in on-time (or early), on-budget (or under), while meeting (or exceeding) all of your customers’ expectations with respect to quality, reliability, or other customer-defined parameters. The general ledger provides only one data point of the many needed in this area (noted previously).

The point of strategic management is to outperform your competitors, and your organization’s general ledger – remember, the source and residence of the CFO’s information – knows absolutely nothing that can help here. It can’t tell you what kinds of work your organization does best. It therefore can’t help inform the selection of work to pursue. And the general ledger processes zero data on what your competitors are doing, or why.

But you can’t tell any of this to some CFOs. No, they’re just convinced that they have all of the quantitative data needed to run the macro organization, and tend to treat anyone with a different business model view as being ignorant in comparison. Having to interact with this type of executive is not unlike being condescended to by a tarot card-reader, save that the tarot card-readers at least have a sense that people who disagree with them might not all be complete dolts.

How do you know if your organization’s CFO is such a one? It’s easy, really.  Just ask yourself, have you ever observed them weighing in on project or strategic management issues, based solely on information gleaned from the general ledger? If the answer is yes, you know two things: (1) your organization is about to make some uninformed strategic management decisions,  and (2) there isn’t anything you can do about it.

I found myself thinking about the many similarities between billion-dollar-generating protagonists Luke Skywalker and Harry Potter recently (actually, it was one of the more productive ways to spend the free time with which I suddenly found myself, after setting aside time for March Madness, only to see my beloved University of New Mexico Lobos make an unexpectedly early exit). Consider:

·         Both are orphans, with mothers who had been renowned for their beauty,

·         and have been living with an Aunt and an Uncle, in an out-of-the-way place in order to hide them.

·         They both have an amazing talent, but, early on, are unaware they have it,

·         but the Aunt/Uncle are aware of it, and hope the boys do not grow up to be like their fathers.

·         An encounter with their eventual mentors reveals this talent, and who they really are in the stories’ larger conflict.

·         Both are pursued from birth by the story’s antagonists,

·         who are aware that the boys are somehow destined to thwart their evil intentions.

·         Both Luke and Harry have friends, but their primary ones are one man and one woman.

·         Early in the stories, it looks as if Luke/Harry will become romantically involved with their primary female friend,

·         but their primary female friend and primary male friend end up having the romantic relationship instead, and both Luke and Harry are okay with this.

·         Both Luke and Harry engage in one-on-one combat with their main antagonists, but the first encounter does not end decisively.

·         The second one-on-one encounter occurs while a much larger conflict is going on in the background, and ends with the protagonists victorious.

A review of the story’s antagonists reveals even more striking similarities:

·         Both Darth Vader and Voldemort have unusual appearances, having been on the losing end of a conflict prior to the timeframe of the telling of Luke’s and Harry’s stories.

·         They both dress in black, head-to-foot,

·         and have the unfortunate tendency to taunt their opponents during combat.

·         Both Vader and Voldemort have murdered underlings who disappointed them, and in a most casual manner.

·         Both story’s antagonists have battled Luke/Harry’s mentors, and lost, but somehow escaped capture,

·         but would go on to kill the mentors (although Voldemort does this indirectly, via Snape [see below]).

And, if you take into account the expanded list of antagonists (Emperor Palpatine and Snape), the list of similarities becomes even longer:

·         All four antagonists dress in black, head to foot.

·         The lower-ranked antagonists (Vader, Snape) are believed to have the potential to be on the right side of the conflict by Luke/Harry,

·         which, indeed, they are, but it is not revealed until Vader/Snape betray Palpatine/Voldemort.

Now, is this to say that Star Wars and its sequels represent the same story as Harry Potter, and its sequels? With such a long list of exact similarities, it might seem to the casual book/movie consumer that only the settings have changed.  And yet, I am wholly unaware of any attempts by George Lucas to file a plagiarism claim against J. K. Rowling (maybe it’s one of those “unintentional plagiarism” things, like George Harrison and “He’s So Fine”). Don’t get me wrong – I’m not saying such a claim should be forthcoming. I’m just noting how both stories’ plots appear to assume a remarkably similar, almost formulaic, arc.

By now, my regular readers are probably wondering “what on Earth does this have to do with project management?” It’s natural for us to try to recreate the conditions and environs that have led to success in the past in our current situations and projects, and to avoid those conditions we associate with past failures. However, this tendency needs to be recognized for what it is: an ossifying element that prevents us from adapting novel technical approaches to our project management problems. In larger organizations especially, there can be a standardization of approach to implementing project management techniques, and these approaches can become so formulaic that they morph into a rigid orthodoxy. And, by the time that sets in, the chances of your organization bringing in projects successfully – particularly and especially projects dealing with new technologies or situations – have just dropped precipitously.

In short, stop pointing your wands and exclaiming “Expecto Success Stategerium!”

Pity the poor Project Managment proprietor. Earlier this week, Pro Football Hall of Fame running back Emmitt Smith had this to say, about a proposed rule that would penalize a running back for hitting a tackler with the top of the helmet:

“I disagree with the rule altogether.  It doesn’t make any sense for that position.  It sounds like it’s been made up by people who have never played the game of football.’’

What does this have to do with managing a Project Management Office, or an organization of Project Controls specialists? Not much, except for the fact that, in most organizations, the answer to the question of how much project management or project controls support is needed for a given endeavor is almost never provided by people fluent in those arenas. The technicians, engineers, and programmers executing their projects’ scope often determine the level of project management and PM information systems support they need and, in my experience, they often get it wrong.

But the way they get it wrong offers a certain fascination. I first noticed a pattern of assessing PM talent demand when I was working for a rather large organization, which would periodically encounter on-the-job accidents. When these accidents occurred, upper management would respond in a very predictable way, decrying the lack of a “safety culture” within the organization, and mandating that all employees attend a series of safety presentations. A renewed focus on performing our jobs safely would then permeate the organization, even those elements that weren’t engaged in any particularly hazardous duties. As the accident rate dropped, so, too, did the overt emphasis on observing the myriad safety protocols put forward by the safety engineers. The unnecessary ones would be ignored first, with very little (if any) impact on the organization’s accident rate. Eventually, some of the basic safety principles would get worked around, and another avoidable, and yet somewhat grisly accident would occur, and the cycle would begin again.

It then struck me how similar this cycle is to the perceived demand for project management expertise. Projects would be muddling along, with the engineers wondering why they had to spend any money at all on project controls specialists or other PM-types, and making the case to save money by abandoning that area of expertise. Some projects would go on to finish successfully, reinforcing the narrative that money spent on the PMO was superfluous and a waste. But, inevitably and eventually, some project would go off the tracks, racking up huge delays and overruns, and all without the ability to have forewarned upper management that a problem even existed before it was too late to avert or mitigate the disaster. A cursory post-mortem would reveal an inadequacy in that project’s cost and schedule control systems, and the demand for those who could set up such systems would realize a dramatic increase. This would continue until a certain sense of complacency would re-enter the management culture, and the engineers would return to their questioning of the need for PM expertise.

All this time, the PMO managers, as well as those in charge of project controls organizations, were dealing with one of two problems: either the perceived demand for their organizations’ services was below supply (in which case they would scramble to find billable work for their people), or else demand far outstripped available talent, in which case their people were working overtime and experiencing burn-out. Depicted graphically, it looks something like this:

In this example, the appropriate level of expertise for this organization is 25 full-time equivalents (how does one calculate the “appropriate level”? For that, you will have to buy my recently-released, must-have book Game Theory in Management). Notice how, as complacency among the technical staff reduces their perceived level of demand to zero, the available talent lags in both amplitude and time. Because technical management is reluctant to come out against, well, reality, they will tend to not communicate their anti-PM sentiments until after these have become socialized and solidified, hence the time-lag in communicating the reduced demand to the owner of those assets. However, PM organization leaders also know that, at some point in the future, this demand curve will reverse itself, so that, even as perceived demand drops to zero, they won’t be rid of all of their talent. These managers will find a way to protect as many of their charges as they can. Note, also, that these managers won’t increase their talent pool to match the zenith of the curve, since they also know that the demand will inevitably drop once the risk of project disasters has faded from memory.

Organizations trapped in this cycle will experience myriad pathologies of business decision-making, which makes all these problems so frustrating to encounter. They are all so avoidable – but you can’t tell that to those who manifest a tendency to discount or even minimize what project management, as a discipline, can bring to the board room.

And that’s why we should pity the poor Project Management proprietor.

As my regular readers know, I regularly tear into the risk management types for the multitude of foibles that lace their approach to project management. I think they overstate their ability to provide relevant business information, their data is far, far more subjective than they are willing to admit, and that Nasim Taleb (in The Black Swan, the Impact of the Highly Improbable) was right when he asserted that overuse of the Gaussian Curve is the greatest intellectual fraud of the 20^th century. But, from a strategic management point of view, their error lies in the assumption that, given enough quantitative analysis, the best strategy can be discovered for most business situations. My take is that the best strategy is one of providing for a robust response to the unforeseeable events that will inevitably transpire on a given project, rather than attempting to calculate the likelihood and impact of such events unfolding. Is there an example out there that illustrates these rival positions?

Of course there is! (Why else would I have posed the question?) Many senior managers today had their view on the world influenced by the television series Star Trek. The original version of the series (nicknamed “the original series,” or TOS) had an iconic episode entitled “The Doomsday Machine.” In it, the starship Enterprise comes across her wrecked sister ship Constellation, which has evidently been in a horrific battle. As Captain Kirk and a boarding party investigate, they come across the  Constellation’s lone survivor, her captain, Commodore Decker (played brilliantly, I might add, by William Windom). Decker tells of what happened to his ship and crew, how they were attacked by an automated weapon of immense size and power. Just as Decker and Doctor McCoy beam back to the Enterprise, the “planet killer” reappears and attacks Enterprise.

With their Captains on board each other’s vessels, we now see played out how their competing strategies are enacted. Commodore Decker takes command of  Enterprise in order to continue with the strategy of “hitting it (the planet killer) with full phasers, at point-blank range!” Unfortunately, this is nothing more than a slight derivative of the strategy that ended up wrecking Constellation, and killing her crew, a fact that Enterprise’s first officer, Spock, points out. Spock also provides the reason that that strategy didn’t work – “The object’s hull is solid neutronium. There is no known way of blasting through it.” I would imagine not – neutronium is the almost incomprehensibly dense metal at the core of white dwarf stars, as they continue their path towards supernova and , eventually, black holes (how the creators of the planet killer extinguished the white dwarf star, mined and shaped its nuetronium into a funnel-like shape, and integrated its propulsion and defensive systems is not addressed). Decker’s strategy did not represent a very robust response the first time, and his modifications to that strategy won’t fare any better.

Kirk, on the other hand, accepts Spock’s analysis that his ship’s traditional weapons will be of no use in their current situation, and immediately abandons the strategy of attacking with those weapons. When Decker is relieved of command of Enterprise, he steals a shuttlecraft and commits suicide by flying it into the maw of the planet killer. Enterprise detects a minute reduction in the planet killer’s power emanations, and Kirk devises a new strategy. He will rig the Constellation’s impulse engines to detonate as she similarly flies into the planet killer’s interior. Naturally, there are some tense moments as Enterprise’s transporter system goes on and off-line, but, at the last possible moment, Kirk is beamed off of Constellation as she flies into the planet killer and detonates, permanently disabling the automated antagonist.

Note that Kirk had no pre-conceived strategy; or, if he did, he abandoned it immediately. He adapted to the situation, and developed a robust response to events as they unfolded. Conversely, Decker had a set strategy, and refused to significantly modify it, even in the face of overwhelming evidence that it didn’t work, and wouldn’t work in the future with nothing more than changing the range with which he confronted his foe. Don’t get me wrong – strategizing is great. But the truly insightful manager will be willing to abandon any strategy when the situation on-the-ground (or in deep space) calls for it.

And for those critics who might be tempted to assert that few real-life management situations are sufficiently similar to 50-year-old Star Trek episodes to provide insight, I have one question:

Are you really a Klingon infiltrator?