The Winner’s Curse And How To Solve It

The winner’s curse comes out of economic theory, but is very relevant to any project manager outsourcing work to vendors.

Essentially if you are bidding out work where:

  1. The costs are uncertain
  2. You are going to pick the lowest bidder

Then there’s a good chance the vendor you pick won’t make any money out of the contract. This is because if the cost of the work is uncertain, all vendors are essentially guessing at the cost, and that’s fine. The problem is that in picking the cheapest vendor you are choosing the one who’s guessed lowest. However, based on the wisdom of crowds the most likely actual cost of the work is the average of all the bids you’ve received, but you’re not paying the average, you’re paying the lowest and the problem there is that the vendor is likely to lose money (the difference between the average of all bids and their bid),

Now, on the face of it that might sound like a good thing, but in practice, if you look at the delays that results on the Wembley Stadium project and Scottish Parliament project look can see that having a vendor who’s not making money working for you can cause problems for the overall project. It’s important to note that this outcome is a result of the structure of the bidding process, and is not because anyone is necessarily trying to rig the bidding.

So, how can this be solved, here are a few ideas (and thanks to the audience at a presentation I gave in Vancouver last year for helping out with these)

1. Declare in advance you will pick the second lowest bidder. This removes the incentive to come as the lowest and win the bid.

2. Ask for a detailed proposal, not just a price. Read the detailed proposals first, pick the best, then look at the price and see if your budget can cover it. If not, either move to the next best proposal, or ask for more funding.

Book Review – The Dead Hand

The Dead Hand is a wonderful historical narrative of the weapons of the Cold War and the negotiations to limit them. The term Dead Hand comes from the Soviet system to potentially automatically launch nuclear weapons in the event of attack. The book covers biological, nuclear and chemical weapons and is most interesting aspect is peeling back the layers of the Cold War negotiations, especially between Reagan and Gorbachev, demonstrating each sides’ perception of the other and what the reality was. The result is very interesting, showing how hard it is to read a negotiating partner accurately and how your own side’s actions and perspectives inevitably color your judgment. Recommended for anyone with an interest in recent history, though learning more about these weapons will likely result in you feeling worse rather than better about them.

Best Books of 2011

Similar to last year, below are the top 5 books I’ve enjoyed most this year. They don’t have much to do with project management, but perhaps that’s a good thing.

Matterhorn/What Is It Like To Go To War – Karl Marlantes is doesn’t pull any punches as a writer. He was a Rhodes scholar at Oxford when he volunteered to go to Vietnam and his two books are essentially different reflections on the same experience. Matterhorn is a hands on book about war in Vietnam, fictional, but obviously drawing on deep personal experiences. What Is It Like To Go To War is part autobiography, part sermon on the same topic, recounting Marlantes’ experiences with brutal honesty (including cowardice, mistakes and prostitution) and once again given a vivid picture of Vietnam whilst also stating his own views on what war does to people and what society should do about it.

Decoded – I wouldn’t have thought I would enjoy Jay-Z’s autobiography nearly as much as I did, his life from dealing to fame is a great story, and he explains the lyrics of his songs in detail, decoding the slang and the meaning behind the lyrics.

In The Garden of Bests: Love, Terror and An American Family In Hilter’s Berlin – A well researched book with a sprinkling of fiction to chart the course of a university professor who President Roosevelt appointed as ambassador to Berlin just as Hitler was on the rise. It makes history real, and clearly shows that evil is not quite as black and white as it appeared in retrospect and how mixed the world’s reaction to it was, at least initially.

Scalper: Inside The World Of A Professional Ticket Tout – This is Kindle only, and part of Amazon’s effort to release shorter books on the platform for $1.99. This is a quick read on the practice of reselling tickets to sporting events told by a former tout. It goes deep into a subject you may not have thought much about and is short enough to retain interest in what is a fairly esoteric topic.

The Hunger Games Series – If you liked the Stig Larsson (Girl Who Played With Fire) series, you might enjoy this too. Like that series it’s coming out as a movie and is easy, but gripping reading. The first book is the best of the trilogy, and the ultimately ending is underwhelming, rushed and bizarre, but it’s a great story up to that point.

VIDEO – 8 Factors That Lead To Success

3 minute video based on interviewing 500 successful people on what made them successful.

Now, to be truly scientific, Richard St John would have needed to pick a control group of less successful people to make sure they don’t have the same attributes.

Nonetheless, this is worth 3 minutes of your time. And if you don’t have 3 minutes the list is: service, passion, work ethic, passion, focus. persistence, drive and perfectionism. But the video adds more color and comedy.

Listen Better

Most people (including me on this blog) tend to talk about communications from the point of view of the person delivering a message or taking the active role. This 8 minute video is interesting, because it flips the perspective to that of the listener. And listeners don’t do a very good job, hearing 60% of what is said and retaining just 25%. This video provides ideas for ways to listen better and be conscious of the filters that we implicitly use to determine what we hear.

How Fast Can You Fail?

It seems counter-intuitive to want to fail fast, but if you stop to think about it, it’s  far preferable to failing slowly. Killing a bad project early is superior to letting it run and not meet requirements. The faster you fail the sooner you can test another idea, and that may be the one that leads to success, and we know that psychological traps such as anchoring means that you’re likely to keep pushing a bad idea for too long, even if it’s not working out.

What this means:

  • Seek feedback early (ideally critical feedback from a potential customer)
  • Follow the path that will get you something testable as soon as possible (Frank Gehry builds models out of paper first)
  • Determine what your criteria for success are (otherwise you might be tempted to bend the goals if you aren’t hitting your targets)
It seems counter-intuitive to make failure the goal, but getting through a large number of ideas quickly is a better way to find a good idea than plugging along with something that doesn’t work. The overall result will be more successes, faster.

The Best Research On Project Management

Some really insightful data backed research on project management comes from Bent Flyvbjerg. He’s originally from Denmark, but now at Oxford University’s business school. You can see a good summary of his research here, and he has a name that’s pretty easy to find on Google.

His recent article in Harvard Business review explains why projects can be subject to the black swan problem.

And a number of his publications discuss the problems of inaccurate cost estimates, especially in public projects, but here is a good summary of reference class forecasting.

Project management is often a fairly practical subject, and so it’s interesting to see the level of deep, theoretical rigor that Flyvbjerg brings to the topic.

17 Beliefs For Project Managers

Bob Sutton is a management professor at Stanford, and publishes a useful blog, he doesn’t publish often but it’s always high quality content and perhaps most importantly, his work is grounded in empirical, research based analysis. It’s oriented towards managers rather than project managers, but there’s obviously a lot of overlap in applicability. Below are his 17 beliefs, which link to the related posts in most cases:

1. Sometimes the best management is no management at all — first do no harm!

2. Indifference is as important as passion.

3. In organizational life, you can have influence over others or you can have freedom from others, but you can’t have both at the same time.

4. Saying smart things and giving smart answers are important. Learning to listen to others and to ask smart questions is more important.

5. You get what you expect from people. This is especially true when it comes to selfish behavior; unvarnished self-interest is a learned social norm, not an unwavering feature of human behavior.

6. Avoid pompous jerks whenever possible. They not only can make you feel bad about yourself, chances are that you will eventually start acting like them.

7. The best test of a person’s character is how he or she treats those with less power.

8. Err on the side of optimism and positive energy in all things.

9. It is good to ask yourself, do I have enough? Do you really need more money, power, prestige, or stuff?

10. Anyone can learn to be creative, it just takes a lot of practice and little confidence

11. “Whenever people agree with me I always feel I must be wrong.”

12. If you are an expert, seek-out novices or experts in other fields. If you are a novice, seek out experts.

13. Sutton’s Law: “If you think that you have a new idea, you are wrong. Someone else probably already had it. This idea isn’t original either; I stole it from someone else”

14. “Am I a success or a failure?” is not a very useful question

15. The world would be a better place if people slept more and took more naps

16. Strive for simplicity and competence, but embrace the confusion and messiness along the way.

17. Jimmy Maloney is right, work is an overrated activity.

Book Review – Mindfire

This is the most provocative book I’ve read in months. The ideas contained in the essays are persuasive and it’s a fun, well focused read. Ideally, I’d like the book to be longer than 30 relatively short essays (hence 4 stars, not 5) but the quality bar is super-high and everything is well written in Scott’s energetic and personal style, and a does a great job of making you take a step back and think/reflect. The essays are short enough that even if one of them isn’t your thing, you’re pretty quickly on to the next one.

To give examples of essays they include topics like “How to give and receive criticism”, which describes how criticism isn’t just about your own views and a perspective and a single correct answer, but also about thinking how different people will interpret the thing that’s being criticized. Many of the essays tend to be motivational such as “The surprise inspiration of death” or “How to be passionate”.

As the author discloses, the essays in this book can also be found on his blog, but either because of the editorial work that’s gone into the book or because of simply reading it on my Kindle rather than a webpage I found it a much more engaging experience than hunting around on the web.

Overall, I really enjoyed this book and would recommend it. If you’re into the writing style of Malcom Gladwell or Michael Lewis then it’s a reasonable bet that you’ll enjoy this, and it’s sufficiently short and focused that it’s a very easy book to get through.

You can find it here on Amazon’s US site.

The Ig Nobel Prize and Innovation – Tanks and Structured Procrastination

Ever since the bra as gas mask idea, the Ig Nobel Awards have been worth following. They follow the same structure as the Nobel Prize, but focus on the most creative and improbable research conducted over the past year. Some are ideas are simply odd, but many are surprisingly clever and insightful here are two of the highlights from this year’s awards.

Using Tanks To Deal With Illegally Parked Cars

The mayor of Vilnius, Lithuania by dealing with the problem of illegally parked cars by running them over with a tank.

 

Structured Procrastination

According to John Perry of Stanford, you can still get things done if you procrastinate, the way to do it is to make sure that you rank all the things you have to do. You’ll still procrastinate and delay the top ranked item, but as long as your lower ranked items are worth doing you’ll still get things done. Therefore, the way to get things done is to work on many important things, rather than one single important thing. The article is here.