Game Theory in Management

One of the easiest aspects of modern risk management theory to blast to smithereens is their excessively irksome notion that risk management somehow includes opportunity management. (“How easy” you ask? Similar to betting on the Sun rising in the East tomorrow.) The evidence for such an assertion is non-existent. For example, consider the Oxford English Dictionary definition of “risk”:

• noun 1 a situation involving exposure to danger. 2 the possibility that something unpleasant will happen. 3 a person or thing causing a risk or regarded in relation to risk: a fire risk.
• verb 1 expose to danger or loss. 2 act in such a way as to incur the risk of. 3 incur risk by engaging in (an action).
• PHRASES at one’s (own) risk taking responsibility for one’s own safety or possession. Run (or take) a risk (or risks) act in such a way as to expose oneself to danger.

Anybody see anything in there that represents a favorable time or set of circumstances for doing something?  Now let’s take a look at the definition of “opportunity”:

• noun (pl. opportunities) 1 a favourable time or set of circumstances for doing something. 2 a career opening: job opportunities.

Anybody see anything here that even remotely implies exposure to danger? Me neither.

In order to further the assertion that risk and opportunity are similar, a premise that is self-evidently false, the argument must morph in to “Are opportunity management analysis techniques similar to risk analysis techniques?” Again, the answer is “no.” While they both have in common an attempt to quantify an unknowable future, they differ is what is unknown about that future. For example, risk responses include:

• mitigation
• deflection
• contingency

And yet no one refers to mitigating opportunity, deflecting opportunity, or preparing a contingency in the event an opportunity presents itself, much less the odds of an opportunity arising. Nominally, opportunity is managed using tools such as the SWOT analysis; yet even here the opposite nature of risk and opportunity is clear.  Just as Strengths are assessed as opposites of Weaknesses, so too Opportunities are captured as the opposing piece to Threats, or risks.

What’s actually going on when the risk management aficionados assert an equivalency between such opposite terms is that they need to have an entity other than dictionary publishers push their poorly-developed ideas, since the notion that risk and opportunity management are closely related is self-evidently false. However, since the risk managers consistently claim to be able to, in some capacity, quantify the future, then it simply wouldn’t do to only capture the bad stuff. In order to support such a statement, they have to be able to foresee the good possibilities as well; otherwise their techniques will be even more representative of highly questionable management science hypotheses than they are already.

As I have oft stated in this blog, the future cannot be quantified with any precision, positive nor negative, opportunity nor risk. Doubling down on the very idea that they can do so by attempting to force a re-definition of these common phrases (“opportunity” has been around since the 14^th century, and “risk” since around 1661[i] -- and about that: how can opportunity be part of risk if “opportunity” was around for more than 200 years prior to “risk”?) can hardly be called advancing the cause of management science.

In fact, that particular tactic more closely resembles something a person who was trying to deceive, rather than illuminate, would attempt.

[i] Definitions of Risk and Opportunity, Merriam-Webster Online, retrieved from http://www.merriam-webster.com/dictionary/risk on 1 August 2016, at 18:53 MDT.

Okay, maybe “die” is a bit strong. But consider: prior to the Ming Dynasty ((1368-1644), China was a technologically advanced and expanding world power. However, once Hong Wu founded the Ming Dynasty, China became a (relatively) closed society. Both trade and diplomatic ties were abruptly curtailed or halted altogether, and the Great Wall was completed in the North, symbolically (if not actually) sealing off China along hundreds of miles. By the time the Qing Dynasty began (1644), the West had attained marked superiority in military, economic, and agricultural technology. Ironically, anti-foreigner sentiments would linger for decades – the Boxer Rebellion (1900), for example, saw hundreds of foreigners killed[i].

Similarly, under the Tokugawa Shogunate, Japan entered into a 220-year long period of isolation, changed only when Commodore Perry returned to Japan in 1854. Prior to this period of isolation (“Sakoku”[ii]), Japan was relatively advanced in its economics and military technology. But by 1854, with trains commonplace in the West, a gift locomotive from Perry created astonishment among the Japanese people who saw it for the first time.

There are many other examples, but these two illustrate dramatically the dangers of organizations – not just nation-states – that attempt to create a narrative or environment where outside or alien ideas or concepts are dissuaded or prevented from being adapted. I believe this effect is scalable. Not only can isolationism dramatically affect entire societies (usually for the worse), the same effect can occur on an individual basis. As I have discussed in this blog previously, arrogance is not just off-putting on an interpersonal level – it prevents the person so afflicted from readily evaluating or adapting ideas brought to them by others. The more humble, then, are in a far better position to take advantage of new, novel solutions to problems that the arrogant one won’t even recognize.

In-between nation-states and individuals, we have corporations and project teams. How amenable are these to recognizing and adopting new ideas, versus holding tightly to a narrative that they have all the answers going in, and are therefore insulated to the outside realm of ideas? And what are some of the indicators that the specific corporation or project team is leaning towards one side of this scale, or the other?

Indicator number one is easy: it’s ProjectManagement.com’s July theme of outsourcing. Project teams especially are composed of people from several (if not many) different disciplines. The larger project teams will almost always include some subcontractors, and it is not at all unusual for very large project teams to include personal combined from companies that would otherwise be rivals. Beware, therefore, the large project team composed entirely of people from one organization. Such teams are almost certainly allowing business model pathologies to change the optimal approach to completing the project’s scope on-time, on-budget. A sub-level clue of this effect occurs when there is a notable, yet artificial, hierarchy among the members of the project team based on their membership in the various organizations within said team.

Indicator number two is a bit more difficult to ascertain, but is a dead giveaway nevertheless. It’s cronyism/nepotism. These two very similar business model pathologies are clear indicators that the organization that is indulging them has walked away from (if not abandoned altogether) a merit-based structure for evaluating and placing talented personnel in their most appropriate roles on the project team. In a way, cronyism is the anti-outsourcing alternative. Instead of giving work to those outside the home organization because the recipients can do the job better, faster, or cheaper, the organization instead gives the work to the recipient simply because they are internally favored, with little or no true consideration of performance.

Finally, if you, yourself, are not an M.D., and you don’t outsource your own medical care, you will, in all probability, die sooner than you would otherwise. So this blog’s title isn’t really all that outlandish after all.

[i] Retrieved from History of China, http://www.chaos.umd.edu/history/toc.html, on July 23, 2016.

[ii] Sakoku. (2016, July 5). In Wikipedia, The Free Encyclopedia. Retrieved 20:06, July 23, 2016, from https://en.wikipedia.org/w/index.php?title=Sakoku&oldid=728508502

It was another dark and stormy night. I was staring at the stencil across my frosted glass office door, eyE etavirP, yrrebpsaR .t yelnatS. My secretary, Anne, had just left, saying “Good night, sleep tight, and if you don’t pay me tomorrow I’m going to kick your &^%,” when the phone rang.

“Stanley? It’s Deborah. You’d better get down here.”

Deborah was my inside source from Monolithic Corporation.

“Why, what’s going on?”

“The big wigs are bringing in some politicians, so it has to be hot.”

“How can I get in?”

“Disguise yourself as one of the custodians.”

“Don’t they need badges, too?”

“Yeah, but the guards never look at them. For some reason, Monolithic treats its cleaning staff rather poorly.”

“Most poorly-run organizations do. Okay, I’m on my way.”

With my cap pulled down low and wearing coveralls, I pushed a trash bin cart straight past the guards. Deborah was right – they barely glanced my way. I headed towards the hall where Deborah’s office was. Just a few feet away, I heard a guttural voice behind me.

“Raspberry! Dang it! You come here!”

I froze in place.

“Yeah, I’m talking to you. Come here!”

I slowly turned, still keeping my gaze low.

“How can I help, sir?”

“Somebody spilled some raspberry preserves in this break room, and if you know what’s good for you, you’ll clean it up RIGHT NOW!”

“Just let me fetch my stain remover, and I’ll get right on it, sir.”

The Monolithic manager huffed off just as Deborah opened her office door and beckoned me inside.

“Get to room 54B; it’s in the basement right next to the Hatfield Conference room.”

“The what conference room?”

“It was named after an obscure ProjectManagement.com blogger. Behind the velvet painting of Elvis there’s a peep hole you can use to listen in.”

As I shuffled in to basement room 54B, I could hear an animated discussion already going on. I closed the door, and pushed the velvet Elvis painting aside, and listened.

Voice #1 (guttural, so I assumed it was Monolithic’s president): “So, as you legislators can see, we don’t outsource anything we don’t have to, meaning more dollars stay here in this country.”

Voice #2 (a bit more earnest, so I assume it was one of the legislators): “But is that the most economical approach? If you were to outsource some of your parts or services, wouldn’t that reduce the costs on your government contracts, and then the taxpayer?”

Voice #1: “That’s not what we’re here to talk about. I want you three to introduce and push legislation that grants preferred status to companies like Monolithic that refuse to outsource, no matter the increased costs.”

Voice #3 (not guttural, but more experienced sounding than the first legislator to respond): “And why would we do that?”

Voice #1: “Two reasons: one, by pushing the preferred-no-outsourcing narrative, you can appear to be patriotic, since the funds stay in this country. Two, if you don’t, not only will we stop contributing to your campaigns, we will start supporting your opponents.”

Voice #2: “That sounds like a threat.”

At this point what I heard sounded like someone had told a really funny joke at a Darth Vader imitators’ convention.

Voice #1: “I’m not threatening. That would be un-American!”

Another very funny joke at a Darth Vader imitators’ convention.

Voice #2: “What about the intellectual forces against that meme, people like Stanley Raspberry?”

Voice #4 (guttural, but younger): “Raspberry? He’s been a pain in our…”

Here I heard a sound like a yardstick being slammed onto knuckles.

Voice #1: “Raspberry and his ilk are nothing to us. If you’re smart, you will do as we say.”

Voice #4: “I don’t get it. If your company is so big and successful, why do you need any kind of help from the government?”

Voice #1: “It’s not about our expenses. It’s about making harder for smaller competitors, who, as you know, could easily undercut us by outsourcing. Customers would flock to them in droves, so we just need you to demagogue this issue, so that people will continue to be mislead about outsourcing.”

Just then I heard the doorknob turn. I let the painting down, and began emptying the trash can as a Monolithic executive walked in.

“Get out of here, custodian!” he growled.

Deborah called me once I had returned to my office, and I gave her the lowdown on what Monolithic was up to.

“What are you going to do about it?” she asked.

“What I always do – counsel my clients to make the best decisions for them, which includes outsourcing, and watch them steadily erode Monolithic’s market share – right after I clean my office.”

In 1981, the rock group REO Speedwagon released a single entitled Take It On The Run, a song that appears to have highly contradictory lyrics. The narrative begins in the voice of a boyfriend who has access to fourth-hand evidence that his girlfriend is unfaithful. The song then jumps back and forth from his apparently believing this information (“…then I don’t want you around.”) and not believing it (“I don’t believe it, not for a minute…”), with a particular non-sequitur thrown in: “You’re under the gun so you take it on the run.”

Since my undergraduate degree is in English, I felt free to try and interpret what the “you’re under the gun” line meant. Unless we’re talking about an active shooter situation, “under the gun” generally means that the person is under extreme pressure. So, since this person – presumably the suspected girlfriend  -- is under extreme pressure, what does she do? She “take(s) it on the run.” Takes what on the run? Her love life? How does one do that, exactly? Is she running from place to place? If so, how does that help her avoid being “under the gun”? Since some variant of this line is repeated six times, the listener could probably safely assume the lyricist thought he was being clear – or else had simple given up on creating an internally consistent narrative.

By the way, Take it On the Run charted at #5 on the Billboard’s Hot 100 list.[i]

Which reminds me of our friends, the risk managers. According to Wikipedia, the definition of risk analysis begins “Risk analysis can be defined in many different ways, and much of the definition depends on how risk analysis relates to other concepts.” Really? A discipline that claims to be a profoundly necessary aspect of project management “can be defined in many different ways.”? Other definitions lack, well, definition, and even the PMBOK Guide® has some of its mushiest language in the risk management section. I maintain that if a concept cannot be clearly and precisely articulated as to what it is, and what its outputs are, then it’s probably an invalid concept, and much sound and fury must be created to obfuscate this fact.

Since what it is is difficult to state, (I defy anyone to make sense of the following: “The goal of risk planning is to establish how the overall risk management will be conducted for the project. The time spent, the role and responsibilities, and template formats of the reports should be all established in this process. Once the preliminary work is done, identifying, analyzing, and adjusting for risks can be done.”[ii]), let’s see if we can shed some light on the topic based on what risk management is not.

1. It’s not a performance measurement system. Risk management cannot tell a PM anything about how his project is performing.
2. It is not a way to quantify the future, since the future cannot be quantified.
3. Much of the input for risk analysis is derived from interviewing the Control Account Managers (CAMs) for their estimate (guess) of the odds of something bad happening, and its estimated (guessed) financial impact, it could be said that risk analysis is an attempt to quantify managerial experience. They can attempt away – experience can’t be quantified.
4. Much has been written about how “positive risks,” or opportunities, also fall under RM’s purview, but this is also just so much silliness. No dictionary outside the reach of the risk aficionados has any reference to “positive” or “opportunity” in their definitions of risk at all – in fact, they are universal in the opposite.
5. So, if RM is an information tool, what information do its analysis techniques pass along to PMs that influence their decisions? The estimated (guessed) odds of something bad happening? How does that help, exactly?

So, risk managers are under extreme pressure (“under the gun”) to present to the management world a coherent structure where their analysis techniques provide verifiable value, when they, well, don’t. Therefore they’re forced into a position of ensuring that the exact definitions of their concepts and techniques are sufficiently obscure as to present a moving target to anyone who would attempt to so define them (they “take it on the run”).

Since RM is a multi-billion dollar industry world-wide, I suspect it has pulled in more money than REO Speedwagon made in their careers. But as for its validity? I don’t believe it, not for a minute.

[i] Take It on the Run. (2016, July 4). In Wikipedia, The Free Encyclopedia. Retrieved 02:08, July 10, 2016, from https://en.wikipedia.org/w/index.php?title=Take_It_on_the_Run&oldid=728209354

[ii] Project Management/PMBOK/Risk Management. (2015, February 25). Wikibooks, The Free Textbook Project. Retrieved 01:55, July 10, 2016 from https://en.wikibooks.org/w/index.php?title=Project_Management/PMBOK/Risk_Management&oldid=2770679.

Politicians and other demagogues have given the business act of outsourcing a bad name, due, at least in part, to the infernal human tendency to overlay some sort of moral judgement on economic transactions that almost always do not involve the person making the judgement. If the person who, say, processes the company payroll is herself an employee, then that is somehow seen as more righteous than if she works for a company that performs the payroll processing service for many companies, particularly and especially if the payroll processing service is headquartered in a different nation. In the case of the latter, some ignoramuses will even assert that such a decision – to outsource the payroll function – is tantamount to an act of treachery, and those cats will step on your face, slander your name all over the place.

But anybody with a room-temperature IQ who gives this even a quick analysis will realize that such assertions are absurd. I’m not a master of internet communications and attractor of PM minds and advertising revenue: I’m just a blogger. In a sense, I have “outsourced” those functions to ProjectManagement.com. Pea farmers have no idea what type of package their delivered crops will use upon their delivery to the market – they’re more concerned with creating and maintaining the best environment for growing peas. If they were to attempt to control all aspects of growing, processing, packaging, transporting, and selling their peas, you can safely bet that the cost of those peas will be significantly higher than the farmers who concentrate on growing their crops, and outsource all of those other functions to those who specialize in them.

No, the judge of which functions should or should not be outsourced is not fear-mongering politicians or hopelessly misguided economics columnists (e.g., Paul Krugman). The proper judge is thoroughly committed to the advancement of people’s well-being, but is known for having a harsh side: the judge is success or failure in the free marketplace. If outsourcing a particular function is a good idea, then the outsourcing company is better positioned to deliver its goods or services at a lower price, or to deliver a superior good or service at the same price, or some of each. Consumers benefit. If the contemplated outsourcing is a bad idea, then the company doing so will be in a poorer position to benefit its customers, and will tend to be eliminated from the particular market. Whether or not the outsourced ability is performed overseas, or by an organization others believe to be unpalatable is truly irrelevant, economically. It really is that simple.

That having been said, is there an exception to which functions can or ought to be outsourced? Yes, there is, and that function is, ironically, Project Management.

Think about it: all of the aspects of asset management can be (and commonly are) outsourced. The aforementioned payroll, plus accounts receivable and accounts payable, are easily performed by specialists in their own, separate organization. Even taxes have been outsourced for generations. In the strategic management realm, companies have outsourced this capability since 1841, when the first advertising agency opened its doors. Of course, advertising is not the complete strategic management function – which is to acquire more market share than your competitors – but it’s pretty darn close.

This leaves only Project Management from among the three management types that cannot be outsourced. Why not? Because Project Management is all about delivering specific scope on the customers’ parameters of schedule and cost, meaning that any attempt to transfer this capability would be to introduce an unnecessary third party in-between the company and its customers. Those companies that deal successfully with their customers do so due (in part) to the directness of the relationship. Now, project controls – the function of collecting data and processing it into usable information for PMs – can be outsourced, since this is an information delivery service, not the actual PM-making-decisions process.

So, in the realm of outsourcing, you can do anything but lay off of my blue suede shoes. Put another way, it’s rather interesting (is it not?) that you can outsource virtually any function that an outside organization may be able to do better or cheaper, but you can’t outsource Project Management.

And don’t even think about drinking my liquor from an old fruit jar.