Game Theory in Management

Wow, has it been more than three weeks since I last mocked the asset managers’ (read: accountants’) approach to quantitative business analysis? I must be slipping. But getting these guys to stay in their epistemological place requires a certain constancy, so – once more to the breach, dear friends!

How do we know if any organizational or managerial pursuit is worthwhile? Why, the asset managers can tell us – it’s the Return on Investment, or ROI (yes, I know I’ve taken this on before. It’s just such an easy target, having been chronically oversold as it has). It is calculated so:

ROI = (Gain from Investment – Cost of Investment) / Cost of Investment

It’s all very simple, isn’t it? Simply calculate the ROI on anything, such as, say, the Project Management Office, and you have hard evidence about whether or not something is worth investing in, right?

As I discuss in my recently-released, must-have book, Game Theory in Management, the late, great Michael Crichton gave a speech entitled “Aliens Cause Global Warming[1], where he discusses the Drake Equation. The Drake Equation is:

N=N*fp ne fl fi fc fL

where N is the number of stars in the Milky Way galaxy; fp is the fraction with planets; ne is the number of planets per star capable of supporting life; fl is the fraction of planets where life evolves; fi is the fraction where intelligent life evolves; and fc is the fraction that communicates; and fL is the fraction of the planet's life during which the communicating civilizations live. As Crichton goes on to say, there is absolutely no way of knowing any of the parameters in this equation. What appears to be a “scientific” equation is actually structured speculation passing itself off as science.

Let’s revisit the simpler ROI equation. What’s the gain from investing in, say, lifeboats? There’s absolutely no way of knowing that. On board the QE II, they’re useless. On board the Titanic, they were priceless.  What’s the value of an Earned Value Management System (EVMS)? On projects that are successful, they may or may not have played a part in that success. On projects such as, say, the National Ignition Facility, where they were initially eschewed, an EVMS could have easily provided early warning on the massive overruns that project encountered – literally billions of dollars (USD) could have been saved.

Remember that scene from the movie Titanic, where the haughty Cal character is striding past the lifeboats, and actually strikes one with his cane, declaring “Waste of deck space on an unsinkable ship!”? How about the millions in taxpayer money that Carl Sagan finagled for the Search for Extraterrestrial Intelligence program, based on the fraudulent Drake Equation? That’s the type of analysis the accountants bring to your project meetings. It’s easy for them to “quantify” the “expected return” of doing project management, as well as its “cost,” and return a hard number indicating that their management information rivals over in the project management office represent a poor investment, or even a waste. So, you’ve got Cal, Carl Sagan, and your accountant, all lined up to provide you with actionable information for you to make key management and financial decisions, and there’s really only one question:

Are you going to listen to them?

This last January 8^th, David Schepp posted an article on AOL® Jobs entitled “Dish Network: The Meanest Employer in America?” In the article, Schepp examines some of Dish Network’s employees’ complaints about how their professional experiences have been, well, bad, due to the decisions of upper management at that organization. The AOL article cites a BloombergBusinessweek article by Caleb Hannan from January 2, describing some of the “draconian” tactics employed by Dish’s then-CEO, Charlie Ergen, including a fingerprint scanner replacing badge scanners for Dish’s Englewood facility access. Employees who were late – even by a few minutes, and even if they had put in 12 hours the day before – would trigger an automatic e-mail to the human resources department noting the late arrival.

As I discuss in my recently-released, must-have book Game Theory in Management, many commonly-held management concepts in use today have their roots in what is actually asset management, and are the theoretical children of the old axiom that the ultimate purpose of all management is to “maximize shareholder wealth.” Slavish adherence to the family of management concepts that are derived from this axiom lead to policies and tactics that are monumentally stupid, and do a lot more damage than just to an organization’s bottom line. In the cases of the unfortunate employees of Dish, both current and former, I would speculate that the dots were connected so:

·         The point of management is to maximize shareholder wealth.

·         Shareholder wealth is maximized when the organization’s assets are performing optimally.

·         Human resources are assets.

·         Optimally performing resources put in many hours, and are not late reporting to work.

·         Therefore, a valid function of management is to ensure the human resources put in many hours, and are not late reporting to work.

It all seems so logical, doesn’t it? But the entire argument’s structure is easily overturned with one simple intellectual exercise. Suppose you had a Dish employee who could completely execute all of the activities expected of the position, but did so in only 4 hours per day. Organizations not blinded by the asset managers’ take on reality would quickly recognize such a one as valuable, and probably seek to advance them within the organization. Other, less enlightened organizations would dismiss the employee for failing to put in more than 40 hours per week.

According to Wikipedia[i], the first reference to the term “going postal” was from a December 17, 1993 article in the St. Petersburg Times, where it cited that 35 people had been killed in 11 shootings associated with United States Postal Services’ facilities in the previous ten years. I would further speculate that certain vulnerable employees become so frustrated in attempting to get ahead in a system designed to ensure that the taxpayers’ money is never, ever wasted, that they arrive at a state of intellectual and professional despair, and employ murderously desperate remedies. Again, a focus on the performance of assets, I believe, led to a working environment that allowed management decisions to appear so rigid and disconnected from the macro organization’s mission that it literally drove the morally weaker elements of the workforce crazy.

And yet, the number of text books and business literature that are entirely predicated on the idea that the point of all management is to maximize shareholder wealth is legion. There’s a major sea-change coming in management science, and, when this Khunsian shift occurs, at its core will be the wholesale rejection of the many management science “truisms” foisted upon us by the asset managers (and, a little bit later, the risk managers). And I am so looking forward to this particular paradigm shift.

There’s just something about the New Year that inspires us to look back at the last twelve months, pick out the things that made us the angriest, and scheme about ways to get our revenge against those who…

Ha ha! Just kidding. We review our last twelve months of Variance Analysis Reports (whaddaymean you don’t do this? This should be a question on the PMP® certification exam: “Do you regularly spend part of the New Year’s Holiday reviewing your projects’ VARs?” Available answers:

·         Yes, it’s a good opportunity to learn from the Project Team’s successes and difficulties.

·         Actually, it never occurred to me. I think I’ll start doing that.

·         I guess this means you PMI® types expect me to be honest in my VARs.

·         Wow, you exam writers are real busybodies, aren’t you?)

…in order to see if some performance trend is emerging that perhaps went unnoticed in the tidal wave of project performance information cascading over your desk on a regular basis. But to seasoned Variance Analysis Report readers and writers, there’s a real art to teasing out the truth in a given project situation from the verbiage in a VAR, much like the reading population of the Soviet Union could read between the lines of Pravda, or Americans can with the New York Times. Some of the more common include:

Of course, this is only a partial list, and, as the financial advisor advertisements tell us over and over, past performance is no indicator of future returns.

Still, …

No month-long theme of evaluating the sources of project failure would be complete without at least some mention of that thorniest of sources, office politics. Most – if not all – of my readers have felt the sting of frustration that comes from seeing, say, a rival for a job posting spending time behind closed doors with a member of the selection committee (if not the boss herself), engaged in conversation or laughter. You just know that the gremlin politics is nudging aside its more straight-laced, conservative influence cousin, merit, and you also know there’s not a darn thing you can do about it.

Let’s start with a precise definition of office politics. Office politics are those interactions among members of the organization that are intended to primarily advance a personal agenda. Unless that particular personal agenda is exactly aligned with the macro-organization’s agenda (which it never is), a conflict of interest is introduced, and the larger organization suffers, however slightly. Ideally, all members of the team you work for would be pursuing the stated objectives of the organization. But, being human, our self-interest naturally comes in to play, and we occasionally find ourselves faced with decisions that may harm the larger group we’re in, but will benefit us specifically. Some level of inflating our accomplishments and minimizing our failures is natural; however, when a significant number of the members of the organization become adept at minimizing others’ accomplishments and maximizing others’ errors, a highly-politically charged environment is introduced into the workplace, and its effects can be devastating.

The lynch pin of the source of political influence is the internal narrative, or script if you will, that we all carry around inside us. As I discuss in my recently-released, must-have book Game Theory in Management, these scripts serve three purposes:

·         They tell us who we are to ourselves,

·         They tell us what to expect from others with whom we interact,

·         And they tell us to what we ought to aspire.

We begin writing these scripts the day we enter the world, and obviously well before we have any notions of causality, logic, or the rules of evidence. People who maintain scripts that are at stark contrast with reality, and provably so, are said to be delusional, but my take is that we are all to some extent, at least mildly delusional. To be forced to quickly rip out and replace nice or complimentary parts of our scripts with reality-based, harsher versions is an extremely painful process, as stock brokers throwing themselves out of Wall Street windows in late October 1929 attest.

Now, your office political movers and shakers know this, at least at an intuitive level. And they are masters at using their favorite tactic, the ex parte conversation, to introduce modifications to the decision-makers’ scripts. By “spinning,” or creating a story that seems to explain why past things unfolded the way they did, and, by extension, explains why the future should unfold in a specific manner, they are in a position to:

·         Maximize their successes,

·         Minimize their failures,

·         Maximize perceived rivals’ failures,

·         Minimize perceived rivals’ accomplishments,

·         And, most insidiously of all, weave it into the decision makers’ internal narrative in such a way that reinforces those parts of their narratives that make them feel good or confident about themselves.

It’s really quite a racket, for being as predictable as it is, this political maneuvering. Note that, in coming up with ways of overcoming or getting around the tainted decision-making process in a politically-charged environment, we have totally abandoned the idea of re-introducing a meritocracy. Not going to happen. Once the “top” salesperson is determined by a subjective selection process among executives, the actually sales figures hardly matter. The most successful code block generator has no shot against the lowest golf handicap. I could go on, but you get my point.

I could offer some fortune-cookie-ish advice on how to survive in a politically-charged work environment, but such environs differ to the point that any such advice would either not be helpful due to being too general, or worthless in your particular setting. I will say, though, that the Jungle Fighters among us do tend to reap what they sow, even if we’re not around to witness their comeuppance. Just hang in there, and don’t become one of them.

After excoriating the risk management types over the past couple of blog entries (they deserved it!) for asserting the efficacy of their techniques far, far beyond their legitimate limits, I’m now ready to do the same thing for a group of management information custodians who have dominated the best-decision-in-any-given-situation dialogue for hundreds of  years, and yet shouldn’t. That’s right – I’m talking about our friends, the accountants.

What we now know as double-entry bookkeeping and accounting first came into existence along about the time of Machiavelli (coincidence?), and has largely monopolized the executives’ information stream ever since.  So prevalent is the suspender-clad ones’ take on the management universe that leaders who have no idea how to read a profit-and-loss statement will make regular reference to the “bottom line.” For my readers who have had occasion to (or even regularly) attend high-level meetings within your organization, let me ask you this: have you ever seen your company’s top executive cede ultimate veto authority over any course of action – no matter how subtly – to the chief financial officer? I have, and I find it appalling. The accountants have successfully manipulated the management information debate into a narrative where the general ledger is the ultimate arbiter of information for high-level decision-making, a sort-of oracle at Delphi dressed in clip-on suspender-supported togas, and I think it stinks.

What kind of information can the general ledger provide? The set of valid general ledger-based management information consists of:

·         How the assets are doing.

…and that’s it.

Of course, how the assets are doing is the basis for such decisions as how much your organization pays in taxes, how much it owes or is owed, how much profit can be claimed, etc., etc. But it is undeniable that data pertaining to assets is the limit to general ledger information. Naturally, your organization’s CFO team will never, ever admit this, but it is undeniably true. Of the information streams they claim to be able to provide, but can’t, the more prominent include:

·         Project cost performance (their pretending to the contrary is one of the more egregious management science frauds perpetrated on board rooms everywhere)

·         Schedule performance (making a list of objectives with associated dates and person(s) responsible is to schedule management what alchemy is to nuclear physics)

·         Estimates at Completion (EACs)

·         Return on Investment!

Yes, I know that last one will make even the most timid CPA sputter with rage. After all, the claim to be able to calculate that variable on any particular asset (or group of assets) serves as the underpinnings for almost all of their subsequent assertions that they can generate the brass ring of information tidbits, the ultimate definer of good business decisions, or bad ones. And it’s all completely wrong.

The basic formula for calculating ROI is:

ROI = (Gain From Investment – Cost of Investment) / Cost of Investment

so that any asset’s ROI greater than 1.00 is assumed to be a good investment decision, appropriate for pursuing.

Do I have to say it? This is sophistry of Cecil B. DeMill proportions. Except in extremely rare cases, the Gain from Investment (better stated as the anticipated Gain from Investment) variable is impossible to calculate. What was the Gain from Investment on the Titanic’s lifeboats? They were assets to the White Star Line, were they not? Why can’t the suspender-and-bow-tie-clad ones calculate it, then? Because if the Titanic doesn’t sink, the lifeboats have zero value, or even negative value if you take the character Cal Hockley’s assertion from the movie that they were a “waste of deck space on board an unsinkable ship.” However, since the Titanic did sink, then the existing lifeboats were literally invaluable.

And yet, how many business decisions are based on this ROI calculation? Even the Project Management Institute® published books defending the need for creating a Project Management Office (PMO) based on … its Return on Investment! 

How many other allegedly useful information streams are out there that are, in fact, either stretched way past their nominal limits of efficacy, or are out-and-out fraudulent? To find out, you can either stay tuned to this blog, or, if you are impatient, then order my recently-released, must-have book, Game Theory in Management.