Game Theory in Management

In my most recent post I referenced the (American situation comedy) Seinfeld episode entitled “The Soup Nazi,” premised on a situation of a restaurant that served soup, and was so popular that the staff felt at liberty to treat their customers abruptly, or even contemptuously. Of course, this notion was being advanced for comedic effect, but it’s really not very far removed from reality. The examples are all around us.

Do a Google® search on “ticket lines,” and hundreds of images pop up of masses of people queuing up to wait for access to concerts, movies – heck, there’s even one for a handmade bicycle show! How much “customer relations management” do you suppose these entertainers, movie theater managers, or bicycle suppliers need to employ? If you said “none at all,” go to the head of the class.

Consider the classic quote from Ralph Waldo Emerson: “If a man has good corn or wood, or boards, or pigs, to sell, or can make better chairs or knives, crucibles or church organs, than anybody else, you will find a broad hard-beaten road to his house, though it be in the woods.”[i] Let’s multiply this formula by negative one, shall we? I’m thinking its inverse is something like this: “If  your product is mediocre, or even sub-standard, you could have your shop right off of Main Street, and you’re still going to have problems attracting and retaining customers,” which would seem to fly in the face of the old commercial real estate axiom, that “it’s all about location, location, location.”

Of course, the first step in customer relations management involves price-setting: McDonald’s isn’t out-performing virtually every steak house in existence because it offers better cuisine – it’s out-performing them because it offers better cuisine for the money. But from a project management point of view, price-setting is rarely an option, since our projects tend to be awarded based on a competitive sealed-bid process – it’s not as if, should our projects suddenly begin to perform poorly, we can offer to knock the price down. It’s usually the opposite – when projects go south, the remedy virtually always involves more money.

Which leads us to the question: In the competitive-bid project arena, how does a project manager lay claim to more money from the existing customer for the agreed-to scope? And the indisputable answer is: via the risk management process.

Think about it – when is the risk management function actually invoked? Isn’t it always in one of the following two events?

·         The establishment of a contingency reserve, or

·         Laying claim to additional customer funds, supposedly due to something happening that the project team didn’t foresee.

For the record, just because a contingency reserve is established at the beginning of a project does not alter the fact that it’s a vehicle for accessing funds over and above the project’s original performance measurement baseline (PMB).

Taken in this light, then, the whole risk management industry becomes simply a facade for changing prices in the sealed-bid project arena, and those customers who place great emphasis on the generation of risk analysis exhibits actually end up enabling the practice. It’s the PM equivalent of having your contractor snatch the completion of your project from your grasp, and exclaiming “No scope for you!”

Throughout my management writing career I've developed a reputation for pointing out issues that run contrary to popular opinion. So, when I saw March's theme of customer relations management, I felt I had a duty to not disappoint. The overall theme from my fellow ProjectManagement.com contributors on the topic of customer relations management is, well, how to do it better. So, naturally, I feel compelled to pen a piece on the virtues of doing it worse.

Consider the third graphic in columnist Michael Wood’s article, Rethinking Customer Relationship Management. It depicts scales, with “What Customers Want” being balanced against “What Organizations Want.” Under these categories are the following items:

What Customers Want:

·         Value for Money

·         Predictable, consistent, and positive exchanges

·         Courtesy and responsiveness

·         Hassle-free experiences

·         Reliability

What Organizations Want:

·         Long-term relationships

·         Loyalty (don’t buy from competitors)

·         Frequency of spend

·         Fair profit margins

Based on the amount of verbiage in the comment section, Mr. Wood’s ideas strike his readers as insightful, and I do not mean to imply to the contrary. However, I would depict these scales with the following changes:

What Customers Want: goods/services

What Organizations Want: money

…with any other modifiers being somewhat superfluous.

For example, do “organizations” really want “fair profit margins?” Don’t they really desire confiscatory profit margins? As for customers wanting courtesy and responsiveness – recall the famous Seinfeld episode “The Soup Nazi,” where a carry-out restaurant’s soup was so popular that its employees felt at liberty to, well, abuse its patrons to comic extremes. Of course, when I am out spending my money I like to be treated with courtesy; but the point here is that it may be rather impractical to structure a given business model assuming that some generalized notion of the motives of those involved in economic exchanges can be captured, much less quantified.

Soooo… if an assessment of interior motives won’t serve as a basis for modifying an approach to customer relations management, what will? I’m thinking outward, observable behaviors can be the basis for evaluating and modifying this branch of management. Tackling CRM from this angle quickly leads to Hatfield’s Rule of Customer Relations Management #1: Bad players do not automatically acquire noble or virtuous characteristics upon assuming the role of customer in economic exchanges. In fact, in the retail industry savvy returns managers have learned to identify those customers who are adept at abusing the return process, and will often meet these people’s immediate demands, along with an invitation to not return to that particular establishment. In the time I personally worked in both the food service and retail sectors I observed such outrageous behavior from abusive customers that I found myself wishing to encounter these people outside of my workplace, just to give them their appropriate comeuppance.

This, then, becomes your customer relations mirror: the outward manifestations of your customer base. If your vineyard produces sweet, high-alcohol content wines – the so-called “dessert,” or “fortified” wines – then your clientele is far more likely to consume your product while it is still in the bottle, often wrapped in a paper bag. Should your vineyard, then, include “Predictable, consistent, and positive exchanges” as part of its customer relations management model?

My take: probably not.

I must give credit where it is due: this management generation’s push towards enhancing and managing the organization’s relationship with its customer base was spurred forward – if not out-and-out originated – with the work of Professor Tom Peters, author of many works, In Search of Excellence being perhaps the most widely recognized. Now, if Professor Peters knows about me at all, he probably loathes me, since I’ve penned a couple of pieces that had some fun at his expense. My problem with his writings, though, remains: although he rightly chides management to exert more energy and expertise towards satisfying customer needs, I've never read where he provides a structure that would enable a sense of proportion or perspective on this increased emphasis.  When I summarized Peters’ work as, essentially, “give all of your assets over to anyone who even faintly resembles a customer,” I was, of course, engaging in hyperbole, but not that much, really. I have not seen any attempt from Professor Peters to offer guidance on what should be the upper boundary on such efforts.

What’s needed is a basic structure, a guide that will help the prescient manager approach the issues associated with managing the customer relationship. Allow me to propose this one:

In a perfect marketplace, our customers would pay us for the work we do, and not pay for work we did not do, plain and simple. Ah, but there’s the rub – so much of what happens in the marketplace is far from being that plain or simple. So, what is going on when we venture outside the green boxes? Much, and those things have major implications for the future of your project team or organization.

Let’s tackle the (4) cell first – your organization is receiving revenue for work it did not perform. I freely admit, this is an attractive quadrant – otherwise, how do those lottery jackpots get so big? What were those ancient alchemists trying to do, really? From whence came the capital that built Las Vegas, Atlantic City, and Monte Carlo? Getting something for nothing has such a powerful appeal that entire governments are elected and emplaced based on this notion, so it’s certainly not so far-fetched to assume that at least some taint of it has seeped into many business models. Think about the asset managers’ main axiom, that the point of all management is to “maximize shareholder wealth.” Blind adherence to this so-called rule would pull the macro organization towards which of these quadrants? Of course, it’s never articulated as such – just the opposite. How many organizations’ mission statements include some boilerplate stuff about making sure the customer receives every bit of value that they have coming?

Indeed, the entire warranty, guarantee, return policy, and quality industries are based on the fact that the organization that is even widely perceived to be in the (4) quadrant will be out of business, and soon. So, while the magnetic pull of the (4) quadrant is powerful, it’s generally acknowledged that it is fatal to be caught there.

What of the (1) quadrant? Taken to its extreme, it is slavery, which is highly repugnant to most everybody. Still, isn’t this quadrant consistent with the essence of what Tom Peters is saying, that it’s better to be at least a little bit in this quadrant than in (4), or even in (3)? Consider what your competition is doing – given a chance, virtually every new entrepreneur (or organizations on fire to acquire new customers) dive head-long into quadrant (1), eager to convince the world that they are much more comfortable there than in the lower quadrants. Once these have attained a loyal customer base, the move towards quadrant (2) will occur, but not too soon. Ironically, they want to convince their potential customers that they can get something, if not for (next to) nothing, then more economically than the competition can provide.

Of course, a more sophisticated structure is detailed in my must-have second book, but this basic one will do for now. And, based on this simple structure, I would like to leave my readers with a simple question:

What role do the risk managers have in any of this?

Most people are probably not aware of this, but the United States did not lose a single major engagement during the Viet Nam war. In fact, the Tet Offensive was a major defeat forf the Viet Cong. Why does this matter? It’s a prime example of how a real victory was turned into a virtual defeat. And, if it can happen on an international military scale, it can (and does) certainly happen on a project-by-project basis.

The opposite is also true: actual project disasters can be spun into outcomes that, if not completely acceptable, are at least okay enough so that significant pushes to find the true causal factors and hold accountable those responsible don’t really happen. How else did the Big Dig escape widespread outrage?

So the savvy PM needs to be aware that successfully bringing a project to close on-time, on-budget does not automatically translate to an accurate narrative. It’s axiomatic, but bears repeating: perception trumps reality, every time. So, which organizational pathologies serve to turn the facts on their heads en route to the accepted narratives? I’m thinking that prime among them is nepotism/cronyism.

Any deviation from a pure meritocracy that the macro organization indulges in is poisonous, and it’s rarely a fast-acting poison. When employees are promoted into leadership positions, not because of displayed talent, but due to political or any non-performance-based element, several effects emanate. For example, did your organization just promote someone who wasn’t the best candidate for a managerial position? And does this organization have a Mission Statement that contains verbiage about a commitment to the customer, or some such? Well, this Mission Statement has just been shown to be false. Clearly the decision to promote the not-so-qualified over his or her betters is a slap in the face to “the customer,” indicating a willingness on the part of the ones making such a decision to act on factors other than optimal performance. Enhancing the personal relationship, but damaging the organization, becomes acceptable decision-making.

The waves from this pebble-in-the-pond spread farther. The rank-and-file of the organization – will they not also immediately recognize that the so-called Mission Statement isn't accurate? And, if that communication from the executives is false, what other statements from them can be trusted (particularly and especially the whole business about “our people are our most valuable resource”)?  The new “leaders” – where are they leading to, exactly? Is it the same managerial destination that the more talented but rejected one(s) would have pursued? Again, if hard work and talent are not to be recognized and rewarded, and the macro organization knows this, I really can’t see why any employee would want to expend effort or engage their talents, other than the bare minimum to stay employed. Once the nominal rewards for exemplary behavior are off the table, those behaviors will evaporate, and soon.

I’m really not trying to come across as hopelessly naïve – I know that John Ross had to move in to the executive position in Ewing Oil vacated by J.R.  But Dallas is television drama, and the real-world marketplace tends to reveal stories more consistent with those that led, say, to Microsoft® founders becoming bazillionaires because those around them in the nascent personal computer industry failed to put into positions of authority the most talented people at their disposal. Cronyism isn’t confined to friends – it also extends to those who adopt a corporate narrative at variance with an unfolding reality. The reasons for these variances can be legion – arrogance, ignorance, a desire to replicate past victories or avoid previous defeats. And yet, let just a portion of the narrative of the causes of these previous victories or defeats be at odds from the facts, and the organization may have ingested the slow poison of cronyism.

And as this slow poison of cronyism spreads throughout the organization’s circulatory system, it becomes awfully hard to differentiate virtual failure from the real thing.

Whenever the topic of virtual management comes up, it’s almost inevitable that its near-cousin, distance management, also presents itself for analysis. I can understand why – as anyone who has read The World is Flat knows, far-flung team members, formed spontaneously into purpose-driven groups, are increasingly edging out the traditional organizational models of people occupying the same real estate as the most desired structure for high-performing projects. And, with the recent and dramatic improvements in long-range communications, equivalent advances in distance management would seem to be the perfect counterpart to giving direction to these virtual teams, right? Right?

Well, not so fast. There were some very good reasons why organizations tended to want to insist on their project teams being co-located, even if these organizations couldn’t clearly articulate why that was so. It may have been simply experience, or a sense that legitimate management just couldn’t be performed via cell phone, e-mail, and the occasional video conference. I believe that this reluctance to embrace distance management had, at its core, a valid concern, one that has wrecked projects and teams since, no doubt, before the pyramids were built (assuming, of course, that they weren’t built by aliens; or, if they were, that these aliens suffer from the same organizational behavior and performance pathologies that afflict us humans). This issue has to do with cooperation within the project team, and can be analyzed to reveal some valuable truisms using (what else?) game theory.

Let’s use the old game-theory standard, the Hawk-Dove Game. Imagine an environment with 100 generic birds, who can either act passively, going about foraging for food and consuming/storing everything they gather; or else they can act aggressively, either preventing other birds from foraging for the available foodstuffs, or else actively taking the passive birds’ food from them. When all of the birds act passively, like doves, the population’s payoff is maximized. However, introduce just one aggressive bird, a hawk, and the behavior of the entire population will change until it reaches what’s called a Nash Equilibrium (named after Thomas Nash, the central figure from the movie A Beautiful Mind). The Nash Equilibrium for the 100-bird Hawk-Dove game is 75/25, meaning that either 75% of the birds will act as dove all the time, or else each bird will act dovish 75% of the time, and hawkish the other 25%. For far-flung virtual project team purposes, the take-away assertion here is this: when all of your team members are exerting optimal effort in pursuing your project’s objectives, your performance payoff is maximized. However, introduce just one member who’s not exerting very much, or even working at cross-purposes to the project’s objectives in order to pursue a personal agenda, and the entire team will tend towards a Nash Equilibrium behavior set that can easily spell doom for your project.

And here’s where the value of the co-located team comes in: the moment any team member exhibits sub-optimal effort or talent, the attentive manager can respond immediately, either by removing the Jungle Fighter / inept team member, or else by influencing them to abandon their selected project-deviant strategy. The distance project manager rarely has access to this sort of insight: the Jungle Fighters in your project team don’t wear signs on their foreheads declaring their uncooperative proclivities, and are usually smart enough to not allow their masks to slip in telephone conversations, e-mails, and the occasional video conference.

So what I’m saying here is that the primary obstacle to effective distance project management is the tendency in some of your team members to either slack off, or else work to advance their own personal agendas instead of pursuing your project’s scope completion. Essentially, change human nature, and your distance management should come off just fine.