Critical Chain: A Business Novel (4 page)

I stop on my way home from the university to pick up some fried chicken. Judith is in New York for the weekend, so nobody is expecting me at home. I hope she enjoys her trip. On second thought, knowing too well what she enjoys most, I hope not.

Judith finds joy in buying things, currently, for our new house. Not exactly ours. We borrowed the money for the down payment. And the mortgage payments swallow my salary increase and then some. This summer I didn't make much extra by tutoring. It's tough.

But the house was such a sweet deal. A real bargain. Judith knows a bargain when she sees one, especially in houses. She is a real estate agent. This year she closed three deals. All involving other agents, so her share was abysmal. The last one she closed last week. Six hundred and eighty-seven dollars. That's why she is now in New York.

The flight and the hotel are about six hundred. Not a chance she will spend only eighty-seven dollars, and our credit lines are stretched to the limit. Maybe we should have another little talk? I shiver. Better not.

B.J. looks out her office window. The campus is particularly beautiful at this time of year, when the trees are so colorful and the students, once again, fill the university with young life.

Less than a hundred yards away is the main entrance to the impressive complex of the business school. She watches Dean Page hurrying down the broad steps. He's heading straight to her office. It's not going to be a pleasant conversation.

B.J. pours the tea, and using silver tongs she neatly transfers two lumps of sugar and hands the cup to her guest. She doesn't need to ask, she knows what he likes; she knows him inside out. She has to. He is a very important player in her game.

"I'm sure you liked it," he gestures toward the general direction of her mammoth mahogany desk. He doesn't mean the desk. He's alluding to his thick, bound document, now resting there.

"For the most part," she smiles.

He is slightly older than she is, and dressed as elegantly. A few years ago his dress code was quite different; sneakers, opennecked shirts, nylon Windbreakers, a professor who liked to blend into the academic environment. No more. Not since he reached the position he always wanted. He won by a narrow margin, but now his position is secure. The business school is his fortress. Professor Christopher Page II intends to stay the maximum term as dean. Maybe even to change the rules that define that maximum.

It's their informal meeting to discuss the business school's proposed budget for next year. They both prefer to hammer out their differences in private much before the budget is formally due. Not that Christopher Page is expecting any difficulties. His proposed budget is what B.J. would expect. The same fifteen percent or so increase from year to year, no surprises. Of course, they'll have to go through the ritual; she will ask for a cut, he will resist, in the end they'll compromise. He even knows on which items. He suspects B.J. knows as well.

"Let me tell you a story," B.J. softly says. "My first job was in a small private university in the Midwest. It was not always a small university. As a matter of fact, about twenty years before my time, it was quite large. Do you know what happened there?"

"No idea," he answers, wondering how she is going to tie it to a demand to cut his budget.
"They had a flourishing agricultural school," she continues in her soft voice. "They allowed it to grow about ten percent a year. It grew and grew, and with it, using your terms, the fixed assets grew: the number of classrooms, number of laboratories, number of tenured professors."
"And then..." Page says out of politeness.
"And then, agriculture did not need so many graduates anymore. Naturally, registration of new students dropped and fewer were eager to continue on to higher degrees. But the burden to maintain the buildings remained, and the need to pay the salaries of professors with tenure remained."
"It happens," he calmly comments, "in agriculture."
B.J. doesn't allow his comment to distract her. She hasn't yet finished her story. "The impact was not restricted to the agricultural school alone," she clarifies. "The financial burden was high enough to mandate a drastic cut throughout all the other schools. Some say it was a miracle that the university was not bankrupt."
She pauses. He doesn't comment.
"You don't think that it can happen to us?" B.J. inquires. "Definitely not," Page dismisses the idea.
"Why?"
"One cannot compare agriculture to business," he says conversationally. "You don't need a university degree to succeed in agriculture. In that field there is no external pressure that forces people to go through higher education."
"And in business there is," B.J. encourages him. "Without a doubt. Today, if you want to climb the corporate ladder you must have an MBA."
"Good for us," B.J. agrees.
Page is a little disappointed. He expected more decisive arguments from B.J. That's not the way to alarm him enough to voluntarily cut his budget.
"Chris," she continues, "there is another field that forces people to go through higher education. Lawyers must graduate from a university. Moreover, in law it's not an option, in business it still is."
Never underestimate her, he reminds himself, and aloud, he says, "I don't see the relevancy."
"I spoke with Paul Dimmers yesterday. You know him?" "Quite well." Page is starting to dislike the direction their conversation is taking.
"They are facing a real problem, he told me. New student enrollments at their law school are less than half compared to three years ago."
Christopher Page examines her face. He cannot decipher anything. Impossible to figure out. Is she aiming at next year's budget, or at something much larger? There weren't any warnings.
Maybe this is B.J.'s way of warning him? He decides to stop brushing it aside. At least until he can find out where B.J. really stands.
"How does Paul explain the drop," he inquires noncommittally.
"That's the interesting part," she answers. "It looks like they were talking about it for quite some time. If we had a law school in our university, no doubt we too would have heard about it before."
Page barely stops himself from saying, "Well?"
"Being a lawyer became a real fad," she starts to explain. "No wonder, considering the base salaries that were being offered. There was a flood of young people wanting to be lawyers. The schools ballooned. Almost a replica of the story I told you about my old university."
Page doesn't have any difficulty seeing how she intends to build the parallels to his business school. It's much more serious than he thought. She's not aiming at the present, she's questioning the foundation upon which his long-term strategy is built.
"You can figure out the story from there," she says. Nevertheless she continues; it's clearly important to her that it be verbalized. "Those many new students, after a few years, turned into many new graduates. So many that they outstripped the demand."
Page now has had enough time to figure out his response. First he must demonstrate to B.J. that he does understand her concerns, and then he must convince her to drop them.
So, without hesitation, he says, "Not all new law graduates could find a decent job. The word started to spread around and the number of applications of new students dropped."
"Quite so," B.J. agrees.
"Nothing to worry about," Page says in his most authoritative voice. He lays down what he considers his trump card. "We are far from saturating the demand for new MBAs."
It doesn't work. B.J. is not impressed. "Isn't the growth in enrollment at our business school the smallest it has been in years?"
"A temporary phenomenon," he dismisses it. "Nothing to worry about."
"Maybe," she says thoughtfully. "Maybe not."
Page cannot afford to leave it like this. "B.J., how can I put your mind at rest about this?" He signals that he is ready for business.
"I'm not concerned with the immediate future," she responds. "My nightmare is to be stuck with an expensive burden that will be almost impossible to trim. For example, you are budgeting for tenure for eight more professors. If push comes to shove such decisions may kill us. What about putting a freeze on all tenure, at least until the situation becomes clearer?"
"No, B.J., that would be a mistake. We need these people. If we don't give them tenure now, we have to let them go. Think of the implications. Think of the shock wave it would send. I understand your concerns, but, in my opinion, there is no reason for alarm. Definitely no reason for such drastic actions."
"Delivering some message is appropriate," she insists.
He knew that eight new tenure appointments would not fly. It was worth a try. "Maybe you are right," he smoothly bargains. "Maybe we should send a signal. The departments should not take us both for granted."
She waits for his proposal.
"I guess we could accept only six," he offers.
To his surprise she is not willing to counter-offer his number. "I'm still worried that what is happening in law schools can happen in business schools," she insists. "What are you suggesting we do about the possibility of a change in the trend?"
Page tries his usual tactic. "I'm not suggesting we dismiss it," he comforts her. "Not at all. We should think about it. Examine the probabilities. Do some research."
"Exactly right," she sails along. "Do we agree that the first, decisive indications will appear as the ability of graduates to get jobs?"
"I guess so," Page answers coldly, thinking about this new angle.
"Do we have to wait until it will not be easy for MBA graduates to get a job that matches their initial expectations?"
"When that happens I agree that the alarm bells should go off. But we are so far from it. Actually, I wonder if such a time will ever come."
Her way of arguing is to say, "Don't you think that as the two people with the responsibility we should monitor the situation?"
"Good idea." He starts to see how he can drag the issue to a committee, where it can be buried for good. "How do you suggest monitoring it?"
"Three years ago the school of business made a broad-scale survey among our graduates. They used the results as a promotional tool to encourage more enrollment."
"I initiated it," he says proudly. "It worked very well. And I do agree with you, we have to repeat the survey. Every year. That will enable us to hold our hand on the pulse of things. I'll initiate a committee to handle it. Right away."
She gently smiles at him. He tries hard to maintain his "collaborative" expression.
"We don't have time for committees, Chris." Before he can object, she turns around and walks to her desk. "Here are the results of our new survey. I think you'll find it interesting. Even quite alarming. But once you study it, I'm sure you'll agree with me that we have to put a total freeze on granting more tenure."
"First I'll read it, then I need time to evaluate, then we'll talk." Page tries to get back his balance.
"We definitely will. More tea, Christopher?"

I enter the classroom. It's still noisy, not all the students are sitting yet, but on my table there is a pile of papers. I arrange them into a neat stack, and skimming through them, pick the one that looks the most professionally organized. "Fred Romero," I read aloud the authors name. The class quiets down.

I keep on reading, "Project title: New production facility in Malaysia."
"May I say something?" Fred asks.
"Certainly."
"This Malaysian project is not one that I'm involved with. I deliberately chose this project because for the projects I'm involved with, I already have some strong opinions about why things are the way they are."
"And you want to present an objective evaluation. Good thinking." And I continue to read from his report, "Project status: the Malaysian plant should have been fully operational eight months ago. Currently machines are installed in all departments except for one, but only three lines out of five are already operating. Output of the plant is currently less than thirty percent of target. Anything to add, Fred?"

"Only that I've heard some complaints that the quality is not up to par. But since I couldn't get any official numbers, I didn't include it."

"Fine. Next item on Fred's report is: Financial status. I love the way you arranged it."
"Standard procedure." He plays it down, but it's apparent that he enjoys the compliment.
"Financial status," I read again. "Due to budget overruns of sixteen point two percent and delays in production, the original estimate of three-year's payback is now modified to five."
"Does everybody understand the term ‘payback'?"
Ruth probably knows the term. Nobody admits that he doesn't. Nevertheless, I explain. "Payback is the time period from investing until we expect the fruits of our investment to cover the investment. For example, suppose that you invest one hundred dollars and you get fifty dollars each year. Assuming no inflation, your payback period is two years. In Fred's case the calculations are a little bit more involved since the money is invested over a period of time. For investing in a new plant, payback of three years is considered to be a very good investment. Considering the risks, five is marginal."
"Five years is the current official estimate, but in my friend's opinion it's much too optimistic," Fred comments. "They are pushing for a formal estimate of a minimum of seven years, but since this project is the personal initiative of the CEO, I'm afraid that it will be some time before the estimate is corrected."
Fred's comments certainly help to bring his report to life. "Official explanation," I read, only to be immediately interrupted by Fred.
"Of course, I didn't interview the CEO. So what I'm calling here the official explanation I took from a memo outlining the explanations given to the Wall Street analysts."
"Even better," I say, and continue, "One: Particularly bad weather conditions that delayed construction. Two: Unforeseeable difficulties experienced by the vendors who supply the machines. Three: Longer than expected negotiations with the Malaysian government concerning employment terms."
I cannot stop myself from commenting, "There is something common to all of them. Do you see it?"
Ted is the first one to jump. "It's all somebody else's fault. The weather, the vendors, the Malaysian government."
"What did you expect?" Fred is slightly impatient. "That's corporate mentality; always blame the external world. But look at what I wrote under unofficial reasons. Here you will find finger pointing at functions inside the company.
"By the way, Professor Silver, I couldn't interview the current project leader, he is in Malaysia, but I don't think it matters too much since once the emphasis shifted from constructing the plant to running it, the project leader changed. I did interview the previous project leader and some of his people. Most of them are back at headquarters."
"Unofficial reasons given by the project leader," I read. "One: Corporate forced an unrealistic schedule to start with. Two: It was dictated that we choose the cheaper vendors, even though it was known that they are less reliable. Three: In spite of repeated warnings, efforts to recruit and train plant personnel and workers started too late."
"By the way," Fred adds, "on this last point, some other people told me that efforts to recruit personnel were late because the machines were late, and they thought it wasn't prudent to hire people and pay their salaries for nothing."
I thank him and continue. "Additional unofficial reasons, given by people reporting to the project leader. One: Too much reliance on vendor progress reports that in subsequent visits turned out to be less than accurate." I look at Fred for an explanation.
"Oh, there are many stories about vendors reporting progress on building our machines that later, on-site inspections showed they had barely started. Or, for example, in one extreme case, a vendor received a hefty order from another company and practically put our order aside for almost three months."
"I see," I say, and continue. "Two: Too loose supervision of the Malaysian construction contractors. Three: The overworked project staff were moved too frequently from one emergency to another. Four: Too many wasteful ‘synchronization' meetings interrupted the actual work."
"Does anybody have a problem understanding the last two reasons?" Fred asks the class.
"No," comes the answer from all directions.
"Can you relate to all the items in Fred's report?" I ask.
And getting a positive response, I continue, "So let's try to use this report to come up with some general observations about projects. Who will offer the first one?"
"I already did," Ted says. "All the explanations for all the problems have one thing in common. It's somebody else's fault. All that we've heard is just a long list of finger pointing.
"We heard more than that," Mark comments in his booming voice. "There is a pattern here. The lower the level of the person, the more the finger points internally, rather than externally. You'll find the same thing in my report."
"Does anybody else see the same pattern in their reports?" I ask the class.
When almost everybody does, I continue to ask, "Which reasons should we consider? The ones offered by top managers who see the global picture or the ones offered by the lower level managers who are much more familiar with the actual details?"
The following discussion doesn't lead us anywhere. We start to flounder. Until Ted says, "One thing's for sure, we can't ignore the lower level managers' explanations. And if so, at least a major part of the blame is internal."
When we all agree, he continues, "It means that the company could have managed the project better."
"How?" Ruth is not too shy to ask.
"What do you mean, how?" Charlie is irritated by her question. "Look at what they are complaining about and fix it."
"I'm looking, and I still don't know how," Ruth answers calmly.
I look again at the list of reasons supplied by the people reporting to the project leader. Ruth is surprisingly observant. I start to realize that her "innocent" questions all stem from a rare ability to look at reality as it is. Since the class is not holding Fred's report, I explain Ruth's remark.
"These people complain about lack of sufficient supervision of the vendors, but at the same time they also complain that they are so overloaded they barely have time to deal with fires."
Ted doesn't give up on his opinion. "It just means that the company has to add more people to supervise the project."
"More people means more time and effort for synchronization," I point out. "Doubling the number of people four-folds the synchronization efforts. You probably noticed that these same people are already complaining that too much time is devoted to synchronization."
"They just have to find a better way to manage themselves," Ted concludes.
"How?" Ruth nails him.
"That's what we are here to learn," Ted passes the ball into my court.
"Thank you, Ted. So, from the reasons given by the lower level managers we can conclude that we have to find a better way to manage a project. No doubt. But what about the reasons given by top management. We can't ignore those reasons."
Agreed.
From the back row, "Can you please repeat the CEO's explanations?"
"Certainly. One: Particularly bad weather. Two: Unforeseeable difficulties at the vendors. Three: Longer than expected negotiations with the Malaysian government. Can you see a pattern here?"
"Yes," Ted is once again the first to answer. "Blame it all on uncertainty."
"Explain."
"Particularly bad weather," he quotes, "unforeseeable difficulties, longer than expected. . . . They are all expressions of uncertainty; of the things that are hard to estimate at the start of a project."
"And you think that there is nothing to it?"
"Not at all," he backs up. "Uncertainty is what typifies projects. It's the nature of the beast."
"If that's the case," I point out, "if that's actually the nature of the beast, then we should find uncertainty underlying the reasons of everybody involved in the project, not just the top managers."
"We do," Ruth quietly says.
We go over Fred's list again. She is right. The project leader's complaints all revolve around the uncertainty. He complains about an unrealistic schedule to start with, unrealistic compared to his estimations of the uncertainties. The vendors were chosen according to cost and not according to their reliability, or in other words not according to their ability to cope with uncertainties. And because of the uncertainty of the date at which the plant equipment would be available, recruitment had to be delayed.
We move to analyzing the complaints of the people reporting to the project leader. The vendors' issue. Surprisingly, initially the class reacted as if it had nothing to do with uncertainties. It took some time to agree that the vendors didn't want to deliberately sabotage the project (a major portion of their pay was pending completion of their job). Why were they delayed? For the same reason Fred's company was; they also suffered from uncertainties. Then we agreed that most fires were a direct or indirect result of uncertainties, and the constant efforts to re-synchronize stemmed from the fires and the ensuing delays.
"Let me summarize," I say. "We observed that fingers are also pointed internally. We agreed that this finger pointing does have merit, and we concluded that the company can do something about it.
"Then we examined the details and reached the conclusion that the thing to do is to better manage the project.
"What we now are saying is that the uncertainties embedded in the projects are the major causes of what we called mismanagement."
"So there's nothing anybody can do," is Charlie's conclusion. "You cannot force certainty on a situation that contains major uncertainties."
These same thoughts haunted me all summer. Is the lousy performance that we witness in most projects a
force-majeure?
A result of the embedded uncertainty? Or is there something that we can do?
At first it seemed like a stone wall. I would probably have given up, if it weren't for the U-2 example.
I start to steer the class toward the crack Jim showed me.
"Everybody in projects knows that projects involve a high degree of uncertainty. We are not the first ones to conclude it," I remind them. "Why isn't the uncertainty properly factored into the original estimation?"
"Because we cannot," Mark booms.
"What do you mean?" I ask. "Who prevents us?"
"Top management," he answers, and then elaborates, "take my project, for example. It was originally estimated to be completed in thirty months. But top management said that was unacceptable and trimmed all the safety. My boss agreed to try and do it in less than two years, which is an impossibility."
"So, you wanted thirty months and top management forced it down to twenty-four months. The difference is twenty percent. Mark, do you really believe, considering the magnitude of uncertainty in product development, that twenty percent safety is enough?"
"It isn't, but what can we do? Top management doesn't allow us even that."
"I don't think so, but maybe our disagreement stems from the fact that we are talking about two different things. You are talking about the safety added to the project as a whole. I am talking about the safety added to each and every step in the project."
Judging by the students' expressions, I'd better explain. "Let's take it slowly. For every step in the project there is a time estimate; the length of time, we estimate, it will take from the start of that step until completion of that step. Mark, when you or your people are asked to estimate the time required for a step, how much safety do you embed in your time estimate?"
"No safety. We give realistic estimations. As much as we can." He is not playing games with me, he believes in what he is saying. I don't see any choice but to dive to a deeper level.
"You all learned about probability distributions," I start my explanation.
Knowing the extent to which students dislike statistics I decide to take it in very clear steps all to the point. "Consider a good marksman aiming to hit a bull's-eye and using a wellbalanced gun. What is the probability of the marksman hitting a specific point on the target?"
I draw the Gaussian distribution on the board.
"You've probably seen this bell shape more than once." Nevertheless, I explain, "The probability of our good marksman missing the target completely is very low. His probability of hitting the bull's-eye is not one hundred percent, but it's higher than the probability of hitting any other point on the target. And here is the probability distribution of an excellent marksman." And I draw a much thinner and taller Gaussian.