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Complexity, Profitability, and Risk Management

The Dubious Science of Barking Dogs

In the Agile Pain Relief blog, Mark Levison ascribes the global economic collapse a decade ago to the market complexity for subprime loans. He quotes Andrew Haldane’s analogy of a dog trying to catch a Frisbee as a complex application of physics, easily avoided with a simple heuristic. While advocating for simplicity, Mark asks, “Why didn’t the financial regulator system catch the problem early, while it was still small?”

The regulators did not ‘catch’ it because it was legal, however ill-advised. It is the job of legislators to define what activities are illegal, and they are reluctant to forbid highly profitable activities. This is especially true when the people making those profits donate to their election campaigns. Thus, people who saw the incoming disaster avoided it by cashing out, buying up oversold assets at the trough and mocking the rest of us. Sort of a social corollary to natural selection. The complexity was profitable, but it was greed that made it unsustainable.

As for Haldane, there are no physics problems in nature. They exist only in the minds of humans who reduce their observations to abstractions, decanting generalized rules that they can discuss with similarly inclined humans. Dogs bark at physicists, for good reason.

Complexity Is More Profitable Than Simplicity

Complexity is relative and temporary. At one time, sending a crate of spices from East Asia to Europe was an incredibly risky and complex endeavor. Now, we just send it via DHL and it gets there the next day if we pay a little extra. There is a tremendous profit potential in reliably reproducible complex activities, executed in volume for a small commission. Making complex activities routine is the source of essentially all commercial success. The activities are no less daunting, but the risk (and containment cost) is spread across far more participants.

Consider modern self-service retail transactions. You wave a six-pack of Dos Equis over the barcode scanner and insert your credit card into a slot. The inventory is updated, the supply chain is notified, and the purchase is made available for stock level analysis. The tax is calculated, and the accounting system is updated. The total is charged to an individual credit account, all without human-introduced errors. Repeat 80 million times a day for the modern U.S. economy and you begin to see real cost savings.

Risk Management and Complexity

There is generally a strong correlation between risk and reward, except for the category sometimes called as ‘stupid risks.’ Think Darwin Awards contestants or investors of subprime REIT assets. To maximize rewards in risky endeavors, the risks must be identified, analyzed, prioritized, and risk containment strategies selected and tested. Do not just assume that ‘responsible parties’ will act responsibly. That is the mistake that legislators tend to make.

Controls simplified for non-practitioners, rather than optimized for outcomes, produce suboptimal results. Similarly, risk management practices dumbed down for the disengaged decision-maker, rather than optimized for predictable, reproducible results, result in more catastrophes. Good decision-making demands an embrace of the details and a willingness to think clinically, rather than wishfully.

Agile methods work only to the degree that they provide frequent points at which course corrections can be made. Marginal expected benefit (reward) can be compared to marginal uncommitted cost (risk) to inform decision-making at both project and portfolio levels.  In other words, deciding whether to continue or change to a new opportunity. It is as easy to apply agile methods poorly and fail miserably as it is to model your approach on a ballistic trajectory, making all your decisions at the beginning and then adjusting based on the point of impact before you start over. By the way, most proponents of agile methods use the term ‘waterfall’ rather than ballistic trajectory because they usually are not physicists. But dogs bark at them, anyway.

Predictable, Reproducible Results

The best argument for agile methods is demonstrative, predictable, and reproducible results. Seventeen years after the Snowbird conference that produced the Agile Manifesto, we have plenty of evidence of what works. Professing agility with an absent top-down commitment to excellent management practices does not work. It does not change a thing. Neither does denouncing Dilbert-style management. We must embrace the complexity, master it, and make it our superpower.

That being said, a rigorous approach to defining the business case, followed by an unambiguous definition of ‘done,’ ruthless execution, and continuous risk management still would not guarantee results. If you want a guarantee, buy a toaster. They’re simple. And dogs don’t bark at them.

 

For more brilliant insights, check out Dave’s blog: The Practicing IT Project Manager

Are you involved in a data conversion project? Then check out Dave’s indispensable book: The Data Conversion Cycle

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