Game Theory in Management

In a previous blog I lamented the use of the literary device of portraying a given management theory in a fictionalized setting, where – wouldn’t you just know it – the theory being presented, when adhered to, leads to fabulous success for the story’s protagonists. This device is disingenuous to Cecil B. DeMille proportions, but there’s no denying it works. Heck, Eliyahu Goldratt used it in his book Critical Chain, and not only did the book do well, there’s actually a Goldratt Institute now, despite the tenuousness of the underlying theory. Of course, I did not take this approach in my recently-released, must-have book, Game Theory in Management (Gower Publishing, 2012), but there’s still an opportunity to fictionalize some of my points in this blog. “If you can’t beat ‘em, join ‘em” goes the cliché, so, with no further ado…

The air was thick with tension when Captain Rodgers strode onto the bridge of his starship, the Geetim (how my book’s title sounds when you speak the acronym – get it?). Several alien species had come together to form a consortium, the Pimbockers, and their warships had been devastating Confederation merchant convoys. The President himself had ordered Rodgers to take the Geetim to patrol those areas of the convoys’ routes where the most devastation had occurred.

“Status report!” Rodgers commanded.

“The main engines are functioning at 94% efficiency, even though two of the cooling coils are down” answered the engineer. “Also, at this rate of fuel consumption, we will have to save cargos totaling over five billion credits in order to achieve a positive return on investment on this mission.”

“Well, that’s interesting, I guess, but why would I want to know that?”

“We were taught at the Academy that a Captain’s main priority is his ship. I threw in the bit about how much cargo we have to save in order for us to know if and when the mission is successful.”

“Yeah, but right now I need to know where the Pimbockers’ raiding ships are.”

“Theoretically speaking, they’re all over the map” the tactical officer stated, flatly.

“No, I meant right now, where are they with respect to the convoy we’re escorting?” Rodgers clarified.

Just then the pretty personnel officer stepped onto the bridge.

“I can help you with your problem” she stated.

“Thank goodness!” Rodgers replied.

“You are under-represented in officers who are descendant from people who were originally from the Southern hemisphere of Mars. But, if you demote your navigator, and promote Lt. B’alayer, you will be fine.”

“That’s not the problem I needed help for.”

“A Captain’s top priority is supposed to be his crew!”

“Look, not to be obstinate” Rodgers began, “but the way I see it, my immediate problem is that I don’t know where the bad guys are in relation to the convoy we’re supposed to be protecting. And, since I’ve already asked for this information twice, I’d really appreciate it you all would stop telling me the sort of information I’m ‘supposed’ to want, and give me what I asked for.”

All of the bridge officers assumed expressions of shock, the personnel officer especially so.

“We don’t use the term ‘bad guys’ any longer, sir.”

“Why not?”

“We can’t presume to know our opponents’ motives, much less if they are good or evil.”

Rodgers sighed, and slumped into his command chair.

“The first bridge officer who tells me where the, yes, bad guys are, and what we can do about them, gets a promotion.”

A junior officer, manning a console in the corner of the bridge, activated the viewing screen and spoke up.

“Sir, if you will look past the blue blinking light indicating our position, and the cluster of white lights showing the convoy, you will see three red lights indicating the position of the Pimbockers. They are currently attacking the lead ship of the convoy, but they are within range of our weapons. Our main batteries are currently trained on them, and are only awaiting your order to begin firing.”

“Open fire!” Rodgers ordered.

A bluish-white particle beam leapt from the Geetim, ripping into the hulls of the Pimbockers’ ships. One was blown apart, and the other two limped off.

The bridge erupted into a shouting argument, about who had delivered the information that was most important to Rodgers’ victory. Amid the din, the Captain motioned for the junior officer to step over.

“What’s your name, Lieutenant? How did you know precisely what I needed?”

“My name’s not important sir.  I knew what you needed because of a two-hundred year-old book, Game Theory in Management, by Michael Hatfield. He explored the epistemology of management information systems, but dealt with the subject in such a way as to make his insights intuitive to lay management.”

“Interesting. Where can I buy this book?”

“It’s available at http://www.gowerpublishing.com/isbn/9781409442417, for a very reasonable price.”

And then, everyone was happy, and peace and joy returned to the galaxy.

The End.

In my previous blog, I blathered on about how project management techniques often fail to perform as advertised in the information technology world, and for what reasons. Now, I want to examine how information technology fails project management in general, and for what reasons.

I was once in a project management office with a fellow who was intent on setting up an information stream that would deliver a report indicating the number of hours budgeted on all of the projects within that offices’ purview, by person, and then compare that to the number of hours those people were actually charging.  He was absolutely convinced that this comparison would yield a highly valuable piece of management information, and was not to be dissuaded. Nevertheless, I gave dissuading him my level best.

“First off, Biff,” I began (Biff wasn’t this guy’s name, but the name “Biff” does sound as if it might belong to someone who’s belligerently clueless, much like the antagonist in the Back to the Future franchise), that piece of information isn’t relevant.”

“How can you say it isn’t relevant?”

“For the same reason that comparing budgets to actuals is irrelevant. Just because you’re doing it on a line item by line item basis doesn’t suddenly make it meaningful.”

“But we have to be able to manage hours on these projects!”

“You’re sought-after information doesn’t accomplish that. What if a project substitutes two junior-level engineers for one senior-level engineer? The cost may actually go down, but your system would raise a red flag. And that doesn’t even address the whole issue of cost performance. Imagine a task budgeted with $25K in labor, and $75K in machinery. Let’s say it comes in at $70K in labor, and $25K in machinery. Your system would go insane, indicating a severe overrun in a task that, in fact, came in under budget.”

Then came Biff’s coup de gras, or so he thought:

“Why wouldn’t you want to know that information?” he taunted.

I think this question is the last refuge of pseudo-intellectual PM scoundrels. Good management is heavily reliant upon information, and by asking the question Biff was, in essence, daring me to contradict this obvious axiom.

“Besides the fact that that information is irrelevant, all information requires time and energy to collect, process, and deliver. In this case, all of the energy needed to set up your system would be utterly wasted. Furthermore, we could use that time and energy in pursuing relevant information – but not if we set up your system.”

Added resistance to Biff’s idea would eventually lead to its abandonment, but I believe this sort of discussion happens thousands of times a day, in hundreds of organizations. As I discuss in my recently-released, must-have book Game Theory in Management (Gower Publishing, 2012) all management information streams must be evaluated with respect to its accuracy, relevancy, and timeliness (or ART). If the information system in question is relevant, but inaccurate or not timely, then the tactics needed to improve in those areas should be employed to see if it’s a good idea to save the MIS in question. However, if the information stream is irrelevant, than no amount of accuracy or timeliness can save it, and it must be abandoned.

Take most risk management systems (please! Bada-bing). They may or may not be timely, but their claims to accuracy are patently absurd (80% confidence interval, anybody?). But, most damning of all, is that, once the project’s baseline is set, the output from the vast majority of risk analysis techniques is utterly irrelevant. Project managers inherently worry about things going wrong on their projects. What use is it of hearing the guesses (strikeout) estimates of the odds of the negative-impact event actually occurring? Unless risk analysis alters the response of the project team to the event – and, in virtually every case, it doesn’t – then the amount of time, energy, and expertise that goes in to performing risk management is a complete waste.

I’ve written other articles and blogs with assertions similar to the ones above, and , with rare exceptions, no risk management aficionado has dared to riposte.  Could it be that even they are beginning to realize the intellectually vacuous nature of their techniques?

Back in August of 2008 I wrote and presented a webinar for PMI®’s Information Technology Special Interest Group on the topic of integrating Earned Value techniques in Agile/Scrum environments (“Stop Those Divorce Proceedings!”). A few years prior to that, one of my PMNetwork columns, “Poor Man’s Project Controls,” made similar points about the unnecessary baggage that has been added to what is considered valid Earned Value Management Systems. And, years prior to that, I presented a paper at PMI®’s annual conference in Boston, entitled “The Bottoms-Up Myth,” about the absurd business practice of mandating a re-estimation of a project’s remaining budget, adding that figure to its cumulative actual costs, and then pretending the resulting Estimate at Completion had intrinsic value.

While the first work (obviously) was aimed at IT projects specifically, the latter two were not. What they all have in common is that they addressed parts of legacy project management that many so-called experts insist must be part of any valid PM information system or approach, but which, in fact, detract from the overall business models of the project where they’re applied, as well as their owning organizations in general. And those are just three examples – there are many, many more of instances of techniques and practices that are considered by the PM intelligentsia to be absolutely vital to “doing” project management correctly that are singularly counter-productive, and have no place in general PM approaches, but are even less appropriate in IT projects.

Consider the standard approach to configuration management. The stodginess of the whole process of identifying the needed change, capturing its scope, estimating the new budget and schedule, writing it up in a Baseline Change Proposal, and getting that BCP approved by the appropriate stakeholders is the probably the single strongest reason that Agile/Scrum was developed in the first place. Think about that – the traditional approach to a major aspect of project management was so moribund that an entire adjunct specialty line of project management was developed, just so IT projects could get around it.

Okay, so how did it become so stodgy? Well, in the construction industry, a favorite tactic of sneaky contractors bidding on cost-plus type contracts is to place a bid that is known to be lower than what they think they need to complete the project. Then, once they win as the lowest bidder, they begin to process change notices and proposals in an attempt to fool the customer into raising the budget ceiling. That’s why the change control process became so highly scrutinized, and why the layers of review and approval were put in place, all appropriate for that industry. Apparently, the experts did not hail from the software industry, where the inability to process rapid changes in input and output functions, not to mention overall processing, often proves fatal to the organization’s ability to meet customer expectations.  Add in the fact that cost-plus contracts are not quite as common in IT projects as they are in construction, and the possibility that some basic precepts of project management being introduced and codified that have little or nothing to do with best business practices in disparate industries becomes near-certainty.

Configuration management isn’t even the most egregious example of standard PM practices having a poor fit in the IT industry. Try performing a risk analysis based on a Monte Carlo simulation on an IT project to see what I mean.

What’s the remedy? I think IT project managers need to be fearless in their readiness to modify, or even abandon, many of the techniques associated with traditional project management, and to completely ignore PM experts from other fields who maintain that they are not “doing” PM properly. In this regard, I may be making PM writer history – I’m actually advocating not adopting aspects of traditional project management!

Just sit right back, and you’ll hear a tale

A tale of a fateful trip

That started from this tropic port

Aboard this tiny ship…

(Opening lines from the theme from United Artists Television’s Gillagan’s Island)

At the risk of alienating many readers, I believe anyone over the age of 30 knows what came about as the result of that “fateful trip.” Seven sitcom actors are “stranded” on Coconut Island, located in Kane'ohe Bay, Oahu, and repeat one of several plots to comic (?) effect for 98 episodes.

Now, back to the real world: what if the current state of project portfolio management theory was utterly lost, unable to overlay any of its prevalent hypotheses onto the tons of facts pouring in from the real world cause-and-effects of the modern macro economy in such a way as to explain them? Would the current array of quants and market analysts inform those who pay them? Would the award-winning economists of this world actually step up and admit that they didn’t know which trends would impact the direction of millions of wealth-creators and in what way in the next few years, months, or even days?

To ask the question is answer it. Of course they wouldn’t. The truth is that modern portfolio management theory can no more “manage” portfolios than they can predict the next incident of Bob Denver's character accidentally thwarting the attempt to get off of the island, and for the same reasons. While significant macroeconomic activity that will impact an organization’s complete listing of projects and assets will inevitably occur, as will incidents of naïve, but well intentioned bumbling from one particular castaway, it’s really quite impossible to accurately describe when, and under what precise circumstances. So, how do you know if your “portfolio management” organization and/or software is truly lost? Here are some hints:

·         The portfolio management function (or software) has no idea of the delineation of the project management and asset management realms.

·         The strategic management function appears to be little more than high-level asset management, or has as its ultimate goal the “maximizing of shareholder wealth.”

·         Your organization has a robust risk management system, and their analysts charge directly to all major projects (this particular one is a dead giveaway).

·         There is no regular, reliable information feed of the status of the organization’s proposal backlog, nor win rates (in dollars) based on customer and type of work.

·         Sadly, another sure indicator that your organization’s portfolio managers should probably take up residence in bamboo and grass huts occurs when they rely on software that is simply expanded versions of platforms that had previously served as general ledger, critical path, or earned value management systems.

I’ve already blogged at length of this inability to quantify the future as many claim to be able to do as part and parcel of their so-called portfolio management systems. So, what’s my alternative? I can capture it in three words:

Robustness in response.

When the unexpected occurs, as it always does, the organization with the best response will always beat out the one without. Is there, then, a systemic way of enacting the Boy Scouts’ motto, “Be Prepared”? Yes, and it lies with the ability to model your organization’s strengths and weaknesses across the three axes of asset, project, and strategic management.

Okay, how does that happen? Well, to get the full 411, you are going to have to purchase my recently-released, must-have book, Game Theory in Management (Gower :Publishing, 2012). Or keep reading this blog – at this rate, I should relay all of the research that went into the book along about 2020.

In his best-selling book The Black Swan; The Impact of the Highly Improbable (Random House, 2007) Nassim Taleb likens what investment brokers, commodities traders, and stock exchange analysts do to snatching nickels from the path of oncoming steam rollers. If I could be so presumptuous as to paraphrase Taleb, another way of putting that would be to say that those who make a living managing portfolios do so while adopting tenets of management theory that are not only flawed, they actually lead to a perspective that prevents the ready identification of profound economic hazards.

In one of my previous blogs, I made reference to a few of these management ideas:

·         The point of all management is to maximize shareholder wealth.

·         Risk Management techniques are applicable to all potential project events, both positive and negative.

·         Quantitative Analysts, or “quants,” on whom the seeming whole of Wall Street investors depend, can consistently generate usable causal analysis of market trends based on observations of thousands of data points pertaining to the various markets.

The first bulleted assumption, which has been pushed by business schools all over academia as irrefutable for decades, is one of the easiest to overturn. Consider what happens during a hostile takeover, as an example. Typically, when a hostile takeover begins, the target company’s stocks jump in value, often significantly. Therefore, if the point of all management was to maximize shareholder wealth, then, in a hostile takeover, no acquiring company would ever follow through on the attempt, and no target company would ever resist. And yet, over and over you see potential target organizations not only failing to sit back and happily watch their company’s equity go up, they will actually engage in tactics that negatively impact their profit and loss statements (like taking a “poison pill”) to avoid the takeover. Clearly, the “maximize shareholder wealth” meme has its limits, but those consultants, accountants, and professors whose paychecks depend on the acceptance of that assertion will never admit as such. And, as such, the theories they propagate that have as a component the maximize shareholder wealth assertion will ultimately prove flawed.

Take also the Risk Management crowd’s basic analysis techniques, the Decision-Tree Analysis and the Monte Carlo simulation. Each requires large amounts of speculation from control account managers, along the lines of identifying potential project-impacting events, their potential impact, and the odds of their occurrence. Once these numbers are collected, the Risk Management aficionados simply love crunching those numbers in various formulas (which, invariably at some point pull in a Gaussian curve) and pretend to deliver some quantification of how the project’s future will unfold. This fails for two very simple reasons:

·         The data used to feed these analyses is pure speculation, and

·         The future cannot be quantified.

As for the quants, they may have been absent from statistics class the day their professors made clear that correlation is NOT causation (generally stated at the beginning of the first day of class). Instead, they pore over massive amounts of data associated with their areas of investment, seeking to place causal links between predecessor events and successor changes in wealth creation or destruction. Then, when they believe they have discovered a certain causal loop, they will make recommendations one way or the other when the presumed causal predecessor events manifest again. I’m not saying they're stupid – far from it. I’m going, however, to paraphrase Ronald Reagan, and say that they just know lots of things that just ain’t so.

With management “science” notions such as these (among many) influencing the current academic debate (not to mention the myriad software platforms) on what constitutes portfolio management, it’s no wonder they entire area of discussion is completely, well, screwed up. Want to know how to navigate your way to a legitimate portfolio management system? Either order my recently-released, must-have book Game Theory in Management (Gower Publishing, 2012), or stay tuned to this blog. The former will give you your answers immediately, the latter will take a bit more time.