Complexity, Profitability, and Risk Management

Writing in the Agile Pain Relief blog, Mark Levison ascribes the collapse of the global economy to the complexity of the market for sub-prime 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. In advocating for simplicity, Mark asks: “Why didn’t the financial regulator system catch the problem early, while it was still small?”

The regulators didn’t catch it because it was legal, however ill-advised. It is the job of legislators to define what activities are illegal, and they are loathe to proscribe highly profitable activities. This is especially true when the people making those profits donate to their election campaigns. So the people who saw the coming disaster avoided it by cashing out, buying up over-sold assets at the trough, and mocking the rest of us. Sort of a social corollary to natural selection. The complexity was profitable – 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, in order to decant 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, complex endeavor. Now we just send it via DHL and it gets there the next day, if we pay a little extra. Making complex activities routine and reliable is the source of all commercial success – the activities are no less daunting, but the risk and capital cost has been spread across far more participants and transactions. There is tremendous profit potential in reliably reproducible complex activities, executed in volume for a small commission.

Consider modern self-service retail transactions: you wave your 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, the purchase is made available for stock level analysis, the sales tax is calculated, accounting system updated, and the total charged to an individual credit account, all without human-introduced errors. Repeat 80 million times a day for the modern US economy, and you begin to see real cost savings.

Risk Management Controls

Controls simplified for non-practitioners, rather than optimized for results, produce sub-optimal results. Similarly, risk management practices dumbed down for the disengaged decision maker, rather than optimized for predictable, reproducible results, result in more catastrophes.

There is generally a strong correlation between risk and reward, except for the category sometimes called “stupid risks.” Think Darwin Award contestants or investors in sub-prime REIT assets. Agile methods work only to the degree that that they provide frequent points at which course corrections can be made and marginal expected benefit (reward) can be compared to marginal uncommitted cost (risk) in order to inform decision-making at both project and portfolio levels. 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 actual point of impact before you start over.

Predictable, Reproducible Results

The best argument for Agile methods is demonstrated, predictable, reproducible results. Nearly twenty years after the Snowbird conference, we have plenty of evidence of what works. Simply professing Agility, absent top-down commitment to excellent management practices, doesn’t change a damned thing. And neither does decrying Dilbert-style management. We have to embrace the complexity, master it, and make it our super-power.

All that said: a rigorous approach to defining the business case, followed by an unambiguous definition of “done,” ruthless execution, and continuous risk management still won’t guarantee results. But if you want a guarantee, buy a toaster – they’re simple.

Title
Complexity, Profitability, and Risk Management
Article Name
Complexity, Profitability, and Risk Management
Description
Making complex activities routine and reliable is the source of all commercial success.
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The Practicing IT Project Manager LLC