How to Mitigate Risks by Not Making Decisions
Experts don't need decision-making.
This post will present another great concept by Dr. Dean Kashiwagi of Arizona State University. We already touched upon his Best Value Procurement model in this post.
The beauty of concepts by Dr. Kashiwagi is the unbeatable logic and intuitiveness.
E.g., he defines an "expert" as "someone who perceives all initial conditions and natural laws" and thus "knows there is only one outcome [and there] will be no decision-making."
Therefore, there's no risk in projects managed by experts. However, risks exist inside the customer organization, where people exercise decision-making.
What we call "decision-making" is, in fact, a choice made by non-experts.
Let's get a bit deeper.
Decision-making as a source of project risks
Traditional project management by decision-making
In the traditional project management model, the customer's team and project manager (PM) must :
- be able to translate business requirements into the technical scope;
- make realistic estimates of the project duration and budget;
- evaluate technical and commercial offers and select the preferred solution;
- draft a contract that
- summarizes technical requirements,
- stimulates a vendor for successful and timely delivery,
- provides sufficient technical and commercial risk mitigations mechanisms;
- supervise the delivery and evaluate the performance of the service;
- maintain the continuous coordination, inspection, measurement, and information exchange with a vendor and its subcontractors;
- monitor the project budget utilization and delivery of projected business values;
- be capable of minimizing the risk of change orders and ensuring technical and commercial consistency.
The obvious shortcomings of this model are multiple, e.g., the customer's PM doesn't have sufficient information to know if the estimated delivery time and budget are accurate. PM may lack experience in similar projects or adequate knowledge of the current industry capability and costs.
Instead, PMs tend to make decisions based on incomplete information, and the contractor must make customer expectations accurate.
The customer procurement agents assume all contractors are identical and can meet the technical specifications. Therefore, the procurement agents create competition among contractors based on price and select the lowest-priced vendor.
Essentially, the customer's team is making decisions to determine the requirements and expectations of the vendor service. Unfortunately, these expectations are usually inaccurate and based on incomplete perceptions of the initial conditions.
Then the customer's team manages the vendor to meet these expectations.
Typical outcomes of this model are various change orders related to the project scope, specifications, time plan, resource allocation, and budget.
The definition of decision-making
Decision-making is the process of defining a set of future actions to reach certain goals under specific time and resource constraints.
This process consists of four steps. We view the decision phases: (1) framing, (2) intelligence-gathering, (3) choice, and
(4) learning from feedback.
Risking by making decisions
Therefore, it is prawn to over 76 cognitive biases and is the core of most traditional project management model problems. Yet, many executives proudly call themselves the decision-makers, while their actions significantly increase the business and project risks.
When people inexactly perceive the initial conditions, the need for decision-making is maximized to recover from the lack of information and choose from various options.
Decisions are usually made when:
- the underlying conditions seem complex;
- in-depth expertise is required;
- there's a disagreement on perceptions of the initial conditions;
- there's a lack of critical information.
According to Kashiwagi, "risk and decision-making are related. Therefore, people who are more dependent on decision-making have a higher risk."
This means that the lesser the need for decision-making is, the lower the risks are.
The situation worsens when the reactive client's team and external consultants manage risks to meet their own expectations. In addition to that, they don't accurately identify the contractors' capability to deliver.
Therefore, risks can be mitigated by:
- minimizing customer decision-making;
- selecting a contracting partner capable of accurately identifying the initial conditions and fairly assessing customer expectations;
- allowing the parties to agree on the standard view of initial conditions;
- reducing customer attempts to plan, direct, manage, and control the project;
- allowing a partner to take control of the project and assume accountability for the outcome.
The decision-free solution is a recipe for bounded rationality
Decision-free solution (DFS) process in stages
The logic of DFS is the following: if there is something the "non-expert" needs to have accomplished, the "expert in something" will do so with minimal risk.
Like Best Value Procurement, the DFS process consists of 4 stages - Definition, Identification, Clarification, and Execution.
- The aim (not deliverables) must be defined by the non-expert and understood by all involved parties (Definition).
- Then the non-expert must identify the expert, who will bring across his expertise in a form, which is totally transparent and easy to understand by the non-expert (Identification).
- Once the non-expert has identified the expert, the expert will plan and explain to the non-expert how the aim will be achieved (Clarification).
- Finally, in executing the plan, the expert keeps the non-expert informed concerning any plans and whether or how this affects accomplishing the aim (Execution).
The implementation of the DFS concept provides a new risk management model that will be as simple as the following:
- the best value expert contractor will preplan, identify the risks they do not control, and minimize the risks;
- the expert contractors are the only party who can effectively perform risk management by documenting the deviations from the baseline plan and justifying all time and cost deviations;
- the customer's best guess requirement must be replaced by the best value contractor's accurate perception.
The theory of bounded rationality
The DFS concept resonates with the works of Herbert A. Simon, the prophet of bounded rationality.
Simon opposed the theory of global rationality, which assumed that the decision-maker operates based only on an "objective" description of the environment of the decision.
Simon defined the bounds of rationality — blurred knowledge and cognitive capacity.
Furthermore, decision-makers search for good enough alternatives according to pre-established criteria instead of maximizing values in a given choice.
"Bounded rationality, a rationality that is consistent with our knowledge of actual human choice behavior, assumes that the decision-maker must search for alternatives, has egregiously incomplete and inaccurate knowledge about the consequences of actions, and chooses actions that are expected to be satisfactory (attain targets while satisfying constraints)." from "Administrative Behaviour" (1997)
Simon identified two forms of rationality - substantive and procedural ones.
Substantive rationality is only concerned with what the choice is made, with its result.
Procedural rationality assumes that the decision-making process, and therefore the agent that carries out this process, influences the decision result crucially. This is because the choice strongly depends on the particular process that generated it, not only on the objectives that oriented it. Hence, it becomes indispensable to know how the choice is taken.
It's time to refrain from decision-making and start trusting experts
The DFS concept looks like an attempted recipe for bounded rationality.
Decision-makers are severely limited by their own knowledge and cognitive capacity. Moreover, the process itself affects the eventual decision.
Under that premise, we should minimize project risks by not making poorly informed decisions and extending trust to experts whose knowledge and cognition are superior to ours.
DFS is super-intuitive, yet it requires a significant paradigm shift.
The customer's executives and the project team will have to declare themselves "non-experts" and refrain from decision-making. Instead, they will have to empower the expert partner and cooperate to deliver a project with minimum risk.
So many people would have to put aside their egos and ambitions, cut the red tape, and work as one team with an expert partner, who would guide them on the journey to success.
How realistic is that?
P.S.
For those interested in original ideas by Dr. Kashiwagi, please follow this link.
For "Administrative Behaviour" by Herbert A. Simon, please follow this link.
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