ProjectThink

Why Good Managers Make Poor Project Choices

Lev Virine, Michael Trumper

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317074793
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Projektmanagement

Projects are constantly beset by problems, often caused by seemingly small mistakes which collectively lead to larger issues. Why do project managers and teams appear to repeat the same mistakes? Can they make better choices without introducing complex decision analysis processes? How can they make better estimates? Project management is the art and science of human interactions. ProjectThink identifies and explains the paths of those intentional and unintentional actions that lead to trouble. It provides advice and guidance in analysing information and risk and explains how 'choice-engineering' can facilitate decision-making and encourage everyone involved in a project to follow the right procedures and work collaboratively.

Part I
Why Do Good Managers Make Poor Project Decisions?

1
Mental Errors in Project Management

It is not uncommon to see good and experienced project managers make poor decisions that lead to issues and eventually project failures. What is the explanation: misjudgment, lack of experience, or do some project managers just run out of luck? People make similar repeatable mental mistakes when they make choices, whether in their personal life or when they manage complex projects. These mental mistakes are a primary source of human error in project management, errors that can eventually lead to project failures.

The Power of Misplaced Perception

Beginning around 1995, a number of large computer companies including Oracle and IBM started a series of ambitious projects. They were trying to develop and market a range of diskless desktop computer devices, which Oracle called a network computer (NC). The idea was quite revolutionary: if computers were mostly used to connect to the Internet, they do not require a very powerful processor, a CD-ROM, or even hard drives. NCs would be much less costly than regular desktop computers were at the time: they could be priced at less than $1,000, a significant cost advantage at the time. Moreover, since the software was installed on a server rather than the NC, the cost to the user to maintain and upgrade it would be substantially reduced. Customers could have a computer that met all of their needs for a fraction of the cost. Despite all of its promise, the idea failed to materialize and NCs were not sold in significant enough quantities (Roth 2009). Why? For this project to succeed at least four conditions had to be met:

1. The price of regular PC computers must stay way above $1,000 to ensure that NCs would be competitively priced.

2. The availability of a wide range of compatible software for NCs.

3. Widespread network availability of network infrastructure sufficient to run NC software.

4. Widespread acceptance by consumers of the idea of network computing where central control was external: that is, someone else on the server side would be in control of the system and data.

Let’s assume that the probability that each condition could be met equals 70%. At first glance, 70% appears to be quite high and chances are promising. But taking a closer look, we can see that there are several conditions that must be met, each of which has a 70% chance. Therefore project success is the product of all of the chances for each condition. It is: 0.7×0.7×0.7×0.7 ≈0.24. So, would you invest millions of dollars on a project with a projected chance of success of only 24%? The makers of the NC most likely faced a similar situation, but went ahead with the project anyway – probably because the executives of these companies were subject to a common mental mistake: they thought that the chance of success was much higher. This mental mistake “overestimating the probability of conjunctive events” is quite common and behind many project failures.

With just this brief example, we can see that organizations are quite capable of repeating apparently poor decisions, but just so you don’t think that this is an isolated case, here is another. In the 1980s, the North Korean government was looking to make a bold statement to the outside world that would illustrate the country’s industrial and technological power and attract much needed foreign investment. The government’s leader came up with a most audacious project – they would construct a building that would be the envy of the rest of the world, a hotel that would not only be the world’s largest, but one of the largest buildings of any type in the world, the Ryugyong Hotel (Figure 1.1). This enormous building was planned to reach a height of 1,100 feet, comprising 105 floors. This project represented an investment of a significant percentage of the North Korean GDP (Hagberg 2008) and would become the centerpiece of the North Korean government’s efforts to showcase the success of their political and economic system and take some of the shine off of the economic success of their arch enemy South Korea.

Figure 1.1 Ryugyong Hotel in Pyongyang

source: Joseph Ferris III, Wikipedia.

As fate would have it, the project did not turn out to be the resounding success that the North Korean leadership had envisioned. Huge cost overruns and a host of technical issues ground the project to a halt in 1992, leaving behind a massive derelict concrete shell sitting in the heart of Pyongyang for all to see. Although some work on this hotel resumed in 2009, the construction of the Ryugyong Hotel has had the exact opposite effect that was intended by the Korean leaders. If they had decided instead to build a rocket or a massive ship and the project failed, the reminders of the failure would fade quickly as the evidence would probably have vanished in a huge explosion or lie on the bottom of the ocean hidden from view, as it did in 2012 when a North Korean rocket broke up in flight (Schwarz 2012). When you fail and leave behind a reminder larger than the Great Pyramid of Cheops, everyone is reminded of this every time they look at the city skyline. Can there be a greater humiliation? So while we can understand the motivations behind the decision to start the project, the question – given the great risks – is why the project went ahead in the first place. Were the North Korean leaders unaware of the potential cost? Even given the large amount of risks and uncertainties associated with a project of this size, calculating the costs was not an impossible task.

These stories have at least three things in common:

1. All managers in these examples had a choice: they could decide not to invest in an unproven computer architecture and they could have chosen not to build an impossibly extravagant skyscraper.

2. These are not trivial choices.

3. Eventually, these choices lead to negative consequences, as they were essentially irrational.

Why Do We Make Irrational Choices?

What do we mean when we refer to something as irrational? People often use long words to describe simple concepts in the hope that it makes them sound intelligent or hide their true meaning. So they will use words such as irrational when stupid would do just fine. However, irrationality is not stupidity, it is a contradiction. It is a contradiction between what we would like to achieve and how we actually choose to achieve it. Why do these contradictions, these irrationalities, occur? Why are good project managers unaware that the decision they have made will not achieve the results they expect? These smart and educated people are capable of making rational choices, but do not do it on a very predictable basis.

Irrationality is a contradiction between what we would like to achieve and how we actually choose to achieve it.

In reality, these decision-makers become subject to mental mistakes. Criss Angel is an illusionist and the star of his own show, Mindfreak. In one memorable show, he hypnotized and levitated a young lady in front of stunned spectators on the street in Las Vegas, similar to the picture shown in Figure 1.2.

Figure 1.2 Levitation: classical example of illusion

source: iStockPhoto

It was incredible and it was an optical illusion: both the live and TV audience appeared to see the young lady floating in the air; however, according to well-known laws of physics, we know that there must have been some sort of support. It was a very compelling display that tricked our minds into seeing a woman apparently floating in thin air. Here is an interesting phenomenon about all illusions: they require people to make the same mental errors. All of the spectators shared the same perception during Criss Angel’s illusion: they saw a lady floating in the air. These illusions or errors in perception are common to all people regardless of place of birth, level of compensation, nationality, sexual orientation, political preferences, language and other factors that distinguish us. For example, the mental errors experienced by a CEO and a dishwasher are the same, except the CEO’s errors will have much greater impact.

Let’s return to Criss Angel and Las Vegas. Here is another optical illusion for you. Take a look at the picture of the Bellagio Hotel and guess how many stories there are (Figure 1.3). Commonly, people estimate that it has about 20 stories, which is precisely what the architect wants us to believe. The actual number is 36.

Figure 1.3 One of the best examples of optical illusion in architecture

source Blake, Wikipedia.

The difference between our estimates and reality is caused by a well-designed optical illusion. In addition to optical illusions, there are a large number of other types of standard mental errors that affect our judgment. For example, project managers often use previous similar activities as guidelines when estimating cost for specific activities. Sounds reasonable, basing your estimates on the results of previous similar activities. This appears to be reasonable strategy up to a point, but then they often believe that cost of current activity should be less because of lessons learned, better management, etc. This may be true, but just as often this is a mental mistake: most likely they will make other mistakes and even repeat the previous ones. Here is an actual example. For the past eight years we have been designing and developing our own project management software. Through these years we have had 12 releases and, without a single exception, they were all delayed anywhere from two to six months. Each time we planned a new release date, we suffered from the mental error that we could improve our process and release the software on time even though we were writing books and articles on this very subject at the time.

For Oracle executives, the belief that demand, cost, infrastructure and software availability would be favorable for them was a mental mistake. This mistake led to a contradiction: millions spent on development and marketing of NCs were mostly wasted. The Ryugyong Hotel project is another example of a contradiction: instead of becoming the first building outside New York or Chicago with over 100 floors or the largest hotel building in the world, it could instead have the title: the World’s Tallest Incomplete Building.

If critical decisions were not subject to the same mechanisms that lead to mental errors, we would have nothing to worry about. If you are lucky enough to attend one of Criss Angel’s shows, see some of his fantastic optical illusions, and appreciate the skills behind the performance, this is nothing but good entertainment. However, if after seeing a Mindfreak show you conclude that the law of gravity has been repealed and you start to base some of your decisions on this, you will probably quickly find yourself in trouble, if not severely injured or dead. Unfortunately, the truth is that people often base their decisions using the same mental errors that cause Criss Angel’s illusions, which can have disastrous consequences.

Alternatively, it might be fair to ask if mental errors can have unforeseen positive effects on projects. Remember, mental errors are erroneous mental representations of reality. Is it possible to make better choices by perceiving a project differently than it really is? Maybe there is a chance that mental errors could lead to better decisions. However, we strongly believe that critical project decisions must be done based on an analysis of reality rather than mental errors.

Mental Errors in Project Management

We are subjected to mental errors everywhere. Everything we see, listen, touch, taste, and smell can be misinterpreted, and our ability to manage projects is not an exception. In project management, the consequences of irrational choices made due to mental errors are failed projects. Here are a few encyclopedic cases of failed projects (Charette 2005; Hall 2005):

• 1991: an inaccurate structural analysis for the Sleipner North Sea Oil Platform led to the loss of the platform at a cost of $1 billion.

• 1994: the U.S. Federal Aviation Administration canceled a project to upgrade the air traffic control system.

• 1995: an overrun of the development of the Denver airport baggage handling system prevented the airport from opening on time. Fixing the extremely bug-riddled system required an additional 50% of the original budget – nearly $200 million. Confirming that people do not learn from previous mistakes: in 2008 a very similar project at the new terminal at Heathrow airport suffered the same fate; hundreds of flights were cancelled when the baggage system malfunctioned (BBC News 2008).

• 1996–99: several major space exploration projects, including the Mars Polar Lander, Mars Climate Orbiter, and Ariane 5 European Space Launcher, were lost because of various errors.

• 2003: a software bug was determined to be a major contributor in the 2003 Northeast blackout, the worst power system failure in North American history. The failure involved the loss of electrical power to 50 million customers and economic losses estimated at $6 billion.

• 2003–04: Customer relations management at AT&T Wireless because of upgrade problems led to a revenue loss of $100 million.

• 2004: Newly automated supply-chain management system of British food retailer Sainsbury’s fails and the company had to hire 3,000 additional clerks. $526 million of investment was written off.

• 2004: Ford Motor Co. abandoned its purchasing system after deployment costing $54.5 million.

• 2005: Hudson Bay Co.’s problem with its inventory management system contributed to a $33.3 million loss.

Researchers who study such projects found that the main underlying reason for these failures is not earthquakes, pine beetle infestations, floods, or other external factors, which are hard to either predict or avoid. Most projects fail because of errors in human judgment, essentially irrational behavior.

Project mental errors are not the only reason for project failures; there is a good measure of incompetence and inexperience lurking in the shadows. But we strongly believe that mental errors are the root causes of many problems. Every year mental errors in project management lead to multi-billion-dollar loses. A 2002 study commissioned by the National Institute of Standards and Technology found that software bugs cost the U.S. economy about $59.5 billion annually, or 0.6% of the gross domestic product (NIST 2002). The same study found that more than a third of that cost (about $22.2 billion) could be eliminated by improved testing. These bugs are not created by nature: animals, volcanoes, and geysers don’t develop the software. The problems were caused by the faulty judgment of people.

Figure 1.4 shows a typical road map to project failure.

Figure 1.4 Road map to project failure

You have a situation in a project that will require making some choices. Here is an example. In 2000, the retailer Kmart Corp., in Troy, Michigan, launched a massive $1.4 billion IT modernization effort aimed at linking its sales, logistics, marketing, and supply systems, to better compete with rival Wal-Mart Corp (Charette 2005). Kmart had many choices regarding the timing and the scale of the project, but decided to pursue a quite ambitious scenario:

1. You often have to deal with mental errors. Upper management of Kmart apparently had many other priorities outside of the IT project and was under the illusion that the project would succeed with limited upper management support. This is a very common mental error. Upper management initiates a project with minimum possible resources and then distances itself from the project, somehow hoping that it will succeed by itself.

2. These mental errors lead to irrational choices. The Kmart IT project had limited budget and manpower. Moreover, the IT project’s relationship with the organization’s business was not clearly established.

3. Irrational choices lead to major project problems or project failures. Eighteen months later Kmart cut back the modernization project, writing off $130 million it had a...