Game Theory in Management

Project Award and Initiation Meeting

Attendees: Hamelin City Council, and one Mr. Pied Piper.

Councilman Marx chaired the meeting.

“So, Mr. … Piper, is it? We are in receipt of your proposal, and have a couple of questions about your stated Technical Approach.”

“Sure, Councilman. What would you like to know?”

“The entire tech approach section is comprised of two words: ‘Trust me.’”

“I prefer brevity.”

“You are fully aware of the scope in our Request for Proposal – elimination of the rats from this town.”

“Sure.”

“Without explosives, property destruction, harm to humans or pets, and finish within the week?”

“Yeah, I read that section. I read the whole thing.”

“Well, then, your proposal is approved. When can you start?”

“Right away. I have a couple of questions of my own, though. First off, how many rats would you say we’re looking at?”

Councilman Marx leaned back in his chair, and then squirmed uneasily.

“Latest estimates are 2.3 rats per square meter. In fact, I believe one just crawled up my leg.”

“Doesn’t that creep you out?”

“I’m kind of getting used to them, but my wife detests them.”

“Yeah, I get that. Also, about my fee…”

“This is a cost plus award fee contract, with a ceiling of 20,000 marks.”

“So, if I get rid of the rats, without destroying property or harming non-rats, I get 20,000 marks?”

“If you do so prior to the end of the period of performance, I guarantee you will max out the award fee.”

“Okay, I will take you at your guarantee.”

Post-Project and Award Fee Meeting

“Okay, I got rid of the rats! Where’s my 20,000 marks?”

“Woah, there, Mr. Piper. It’s not that simple.”

“It’s not?”

“No. As promised, you maxed out the award fee, but that was up to 25% of the total project costs, which we felt was exceedingly generous. By our calculations, you spent one day here. At the rate of 10 marks per hour, and assuming you will bill us for an entire day, that puts you at 80 marks. Add in the per diem rate for Hamelin, plus your material expenses – one flute – and we have a total of 120 marks. With the award fee, that brings us to 145 marks.”

“145? What happened to 20,000?”

“This isn’t a firm fixed price contract, Mr. Piper. It’s cost plus award fee, which means we, as your customer, have to have some form of oversight over your work. Since you failed to disclose your technical approach, we couldn’t perform a risk analysis on it, and therefore evaluate your baselines. We are the offended party here, Mr. Piper, since you refused to comply with our baseline evaluation and change management requirements. But, since you did do such a remarkable job, the City Council of Hamlin is prepared to add to your remittance an additional 500 marks.”

“That’s still not even half of the original deal.”

“True, but we need to spend some money on inter-city relations. You know the town just downstream of Hamelin on the River Wesen, Holzminden? Well, their council is pretty upset with the tens of thousands of rat carcasses floating down the river, and they’re fixin’ to sue us through the Environmental Protection Agency.”

“That’s not my problem. I fulfilled the terms of the SOW to the letter, and I expect my 20,000 marks, or you’ll be sorry.”

“Threats won’t work here, Mr. Piper. Besides, what could you possibly do with nothing more than a flute?”

As we address the May theme, of Change Management, there are many elements…

OUCH! What the heck was that? A dart with Sodium Pentathol?  Well, I’m kind of up against my deadline, so I’ll go ahead and see how far I can go before my writing degenerates into meaninglessness (Detractors! DO NOT post comments along the lines of “too late!”).

As I was saying, the main elements involved in Change Management have to do with a commonly-accepted aspect of project management, that no project is completed on-time, on-budget, with the original scope intact. There seems to always be unanticipated events that occur while the contractor is pursuing the scope, events that even the most advanced risk management-type (or least advanced – there really isn’t much difference) can’t anticipate. So, what happens when these unanticipated events – also known as “reality” – occur?

Well, the contractor typically prepares a document to change the scope, cost, and/or schedule baselines. entitled Baseline Change Proposals (BCPs), Baseline Change Notices (BCNs), or whatever, and their purpose is generally the same: to notify the customer that something has changed, it’s gonna take more money and time, and would you please sign your name on to this form so we can keep working?

Generally speaking, though, the nominal approach that most buyers use, that of awarding the contract to the lowest bidder, pretty much invites the nefarious tactic of “low-balling” the contract. This is where the less-than-virtuous proposing contractor deliberately bids a price below what they believe they can execute the scope, relying on the Change Management process to alter the cost and/or schedule baseline to get to a point where the work is actually profitable. Most buyers are aware of this tactic, which leads them to perform the management of baseline changes with a scrutiny that would put Sherlock Holmes to shame.

A version of this buyer/contractor conflict exists in many markets. Right out of my undergraduate work I lived with two roommates, one of whom was a Porsche mechanic. It didn’t matter if the customer came in for something as innocuous as an oil change – all of the mechanics employed at this shop were expected to find other “problems” requiring attention. Usually, the way to manage this effect at the car shop would be to have the member of the family who spent the most time as shade-tree mechanic do the negotiating with the service manager, so that marginally superfluous work, or repairs that should wait, could be declined.

Over on the project management side, though, much of the change management process is often tied up with the establishment and maintenance of certain reserve accounts, Management Reserve and Contingency being the most notorious. When these reserve accountants were first popularized, they had a specific function associated with them. Management Reserve (MR) would be established after the Performance Measurement Baseline had been set, and was created by the project manager issuing a request of each of her Control Account Managers to give back some of the budget (usually around 5%) that they had been originally allocated. If the CAMs neared the end of their part of the work, and needed the 5% back, then it was usually okay. Optimally, the CAMs would find a way to complete the work at a 5% savings; however, if some of them needed more than the 5% they had originally pushed back, then the whole of the project would not be automatically in an overrun condition.

However, the management of MR has been ruined (strikethrough) made weaker by the modern practice of re-defining it. Rather than have it serve a function, it is now often defined by who controls it, rendering it impotent. Previously, the PM had complete latitude with how the MR was used. Now, it’s just another way for the customer to scrutinize the PM, and potentially deny the funds (and latitude) needed for successful project completion.

Wow…the words on the screen are getting pretty blurry at this point. It’s too bad, too, ‘cuz I was just about to launch into a discussion about what I really think of…

There’s a very irksome characteristic of the management sciences that involves the re-introduction of established ideas, but with new names. Of course, if those ideas were all that in the first place, they wouldn’t need to be re-packaged and sold to the same people who had either tried them and found them wanting, or else rejected them out of hand in the first place.

Two examples pop to mind. In 1997, Eliyahu Goldratt published The Critical Chain, a novel about a business school professor who presents as a new and insightful tactic the idea that resources assigned to non-critical activities in a Critical Path Methodology (CPM) network can be temporarily re-assigned to the critical ones, and help shorten those activities, thereby compressing the project’s overall duration. Clever, no? The problem is, it’s an old and familiar tactic, better known by pre-1997 practitioners as “crashing the schedule.” It’s not even that novel a tactic. Anyone familiar with Critical Path Methodology would probably recommend it the first time their project’s end-date needed to be moved up.

There are other problems with critical chain (such as the added costs of assigning non-expert personnel to activities that just happened to be on the critical path), but that didn’t stop the novel’s protagonist from winning out in the end (wouldn’t you just know it?). But “critical chain” sounds so much cooler than “crash the schedule,” doesn’t it? “Crashing the schedule” is how those old guys, staring into their slow-phosphor-burning terminals and mumbling about the proper number of start-to-start relationships in the network would put it. “Critical chain” is how young, thin, hip students of young, thin, hip professors would articulate the concept.

It is, however, the same idea, with the same issues as before.

Another example is the “Life Cycle Costing” craze that hit in the 1980s. All of a sudden, estimators and cost baseline creators were being admonished to consider all of the costs a given project would incur, including post-delivery to the customer. The main example I remember from the trade magazines at the time had to do with buildings, and how important it was to take into account their predicted life-cycle energy costs and water consumption over theirs planned existence. The Life Cycle Costing push had the same two problems that critical chain had: the ideas were hardly new, and they were plagued with problems.

First off, the idea that a construction company would fail to take into account the heating and cooling costs of a building prior to selecting its design and materials is just plain goofy, if for no other reason than the accountants would want to know the basis for amortizing its depreciation. Of course the projected future costs of the projects were taken into account – otherwise it would have been impossible in almost all cases to procure funding.

Secondly, it’s really quite impossible to quantify the future of anything, and that includes the end-result of projects. Referring back to our sample building, other than commodities speculators, who believes that energy costs can be accurately priced going in to the future? And, if our building is in California, who would have believed back in, say, 1997, that water prices would spike eighteen years later, and usage controlled by the government? And those are relatively mild fluctuations compared to the chances of the building being consumed by wildfires, or earthquakes. The assertion that a given building’s “life cycle” can be accurately quantified should be considered as sound as the claims of a tarot card reader, who makes similar statements on the predicting of their customers’ “life cycle.”

Which brings us back to April’s theme, sustainability/green project management. When, in the history of business, has completing a project with an excess of wasted resources been considered a good idea? The answer is never. For example, the plastics industry was furthered from an abundance of the compounds left over from the petroleum cracking process. In economic terms, the very existence of leftover resources that even might have an economic use in a different venue is an automatic signal of a missed opportunity.

Don’t get me wrong – “sustainable” or “green” PM is a great idea, but it’s hardly new. I guess the re-branding of long-established concepts is what we have to do to stay young, thin, and hip.

In my blog from last week I pointed out some ways that basic project management techniques are often at odds with the sustainability tactics, at least those documented by Rotary International. After I had posted that piece, nationally syndicated columnist George Will published an article[i] that sharply criticized a major American University whose board of trustees thought it would be a good idea to divest the University’s holdings of oil companies, all in the name of “sustainability.” (I have no idea if Mr. Will is reading my blog postings, but it was a remarkable coincidence.)

So, if a University’s trustees divesting of un-PC corporations in the portfolio is a managerially silly gesture (my words, not his), as Mr. Will maintains (and I agree), then exactly what does constitute legitimate sustainability in the business decisions of a University?  To answer that, let’s look at the business model of a typical American college, albeit at a highly generalized level.

Colleges offer advanced education. To do so, they need several things, including:

·         An adequate facility (is ivy a requirement?)

·         A faculty

·         Certifications and permits from myriad agencies, but, most important of all,

·         Students who are able and willing to pay the asking price of tuition.

To this end, most universities receive funds from sources other than their students’ tuition. The college I attended for my undergraduate work, the University of New Mexico, is a land-grant university, meaning that it was given large tracks of (then-marginally valuable) land at the beginning of its endowment. As Albuquerque grew, and more college-bound people were born in (or came to) New Mexico, this land grew in value, and was used, built-on, leased out, or otherwise leveraged to advance the University’s goals. (As an aside, the fact that UNM is a land-grant university is painfully apparent if one should play their championship golf course. Even their par-3s look like they go on for a country mile.)

Another significant source of a college’s income: donations from former students who have gone out into the workforce and used their degree(s) as a professionally valuable asset. From the University’s point of view, the more valuable the granted degree, the better the odds that the alumni will look their way when it comes time to determine the objects of their charitable dollars. So, what makes a degree valuable?

The same thing that makes any asset valuable – the ability to acquire it at a low price, and receive a substantially better return.  According to Poets and Quants[ii], a Harvard MBA should expect to earn $3.233M over a 20-year period, while a Texas A&M MBA can expect $1.782 over the same time period. However, tuition at Harvard Business School (along with other fees) can easily exceed $120K per semester. At Texas A&M, it’s a third of that. An admittedly very rough comparison yields a delta of $320K for just the graduate program. Harvard’s costs are around 14% of its 20-year yield. Texas A&M’s is only about 9%.

Interestingly, when I did a Google® search on how much a Harvard or Texas A&M MBA should expect to earn, I got a lot of hits. But when I did a similar query on degree programs for majors ending in the word “studies,” I could find no similar evaluations. I’m guessing it’s because comparing the costs of those degrees with their expected return would yield some disappointing data for those programs, meaning that the Universities that have set them up should expect fewer dollars from those alumni. And that, in turn, means that offering programs that fail to produce graduates who are prepared to create wealth is a decision against sustainability, for the University, anyway. Given its business model, the University needs to be economically viable in order to expand facilities, attract top faculty, or lower tuition. Any management decision that pushes against its economic viability is hindering its ability to sustain itself, by definition.

My point? Don’t be sidetracked by spurious claims of “sustainability.” Either the affected business model succeeds to the point that its owning organization can continue into the foreseeable future – literally sustains itself – or it does not. That’s how sustainability is determined in the management realm.

Yeah, I know this month’s theme is supposed to be about how much project management and sustainability are copacetic. It’s just that, well, in some cases, they’re not, by which I mean the intellectual underpinnings of “sustainability” are occasionally in conflict with some basic elements of project management theory.

The organization Rotary International issued a pamphlet in July of last year[i] listing “six steps to sustainability.” These steps included:

1.      Assess Community Needs

2.      Use local materials

3.      Identify a local funding source

4.      Provide training, education, and outreach

5.      Motivate beneficiaries to take ownership

6.      Monitor and evaluate.

Let’s take these one at a time.

The Assess Community Needs step involves “…conduct(ing) a thorough assessment to identify a community need…”[ii] I can make this step really easy – what service, commodity, or product is in the most demand, or is commanding a comparatively high price? That’s what the free marketplace does: it highlights scarcity with increased prices, just as abundance is signaled through low prices. It really is that simple.

Use local materials. Why? Isn’t the most economically available material indicated for the most efficient project delivery? (I mean, seriously, we PM-types don’t even need to weigh in on this – we should be able to sit back and let the accountants tear into this assertion.) And isn’t the most efficient project delivery the greenest?

Identify a local funding source. Again, why? If I squint really hard, I might be able to see the reason behind assertion #2, that of using local materials. If the prices are the same, then using local vendors increases the monetary multiplier within the community.  It’s a short hop back on to that familiar soap box – its price would reflect that! But, stepping back down, this has nothing to do with funding. Funds are transferred from bank to bank over telephone wires. The days of the armored truck carrying large amounts of cash from city to city are over and done. The savvy project sponsor will access the best source of funding, and that almost always translates to the most efficient – the actual location of the source’s home office (assuming the location is not on the State Department’s list of terrorism-exporting nations) is irrelevant from a PM point of view.

Provide training, education, and outreach. Not unless the project is to set up a college. The pamphlet explains that this step is necessary to “…strengthen beneficiaries’ ability to meet project objectives.”[iii] By blurring the lines between the project team and the project’s beneficiaries, a convenient appeal for grant money is created. Who, now, exactly, is pursuing the project’s scope? Can they be managed? If so, they probably need little additional training. If not, why should project budget be expended towards ends that have nothing to do with accomplishing the scope?

Motivate beneficiaries to take ownership. If the project’s “beneficiaries” do not immediately and willingly “take ownership,” then the entire point of the project is suspect.

Monitor and Evaluate. Finally, a project management-consistent objective! And here is where the PM and Sustainability worlds most closely coincide. Real project managers use earned value and critical path methodologies to monitor their cost and schedule performance. If the project is doing well, then some decisions on the resource management front may be accommodated that serve the sustainability ends without endangering the successful completion of its scope. On the other hand, if the project is behind schedule or over cost, then the project sponsor and/or project manager have a choice, between pursuing the project’s objectives in the most efficient manner possible, regardless of its sustainability rating, or else selecting the most sustainable resources at the potential expense of the successful conclusion of the project.

But at least project management techniques make the evaluation of this trade-off an informed decision.