On Gambling, Logic, Statistics – and Project Portfolio Return Optimization

On Gambling, Logic, Statistics – and Project Portfolio Return Optimization
April 5, 2011 Joseph Paris
gambling

Several years ago, a good friend of mine invited me for a “guy’s weekend” in Atlantic Citywhere we were to stay at the Tropicana.  It sounded interesting enough as he and I always had a few laughs together and I had never really been to a casino before.

In fact, when we arrived at the Tropicana, one of the people at reception asked, “When was the last time you were in Atlantic City?”  My response was, “The last time I was in Atlantic City, there were no Casino’s”.  You see, my parents used to take us to vacation there when I was very young and I had not been back since.  That was a VERY long time ago.

The Tropicana was nice enough.  The hotel and casino was very expansive (at least to me) and well kept.  They had a rather extensive “free buffet”, but I was rather repulsed by the herd mentality of the patrons. Most people seemed to use it as a filling-station – topping off their tanks before they went back to the tables.  It was not for me. However, they had several nice restaurants with “national” themes such as: Russian, Italian, Cuban, French, and several others – and these were much more my style.

As I walked through the main floor of the casino, my senses were near overcome with all manner of lights and sounds from the slot machines.  I noticed that calling them “one-armed bandits” didn’t seem appropriate anymore because people just sat in front of them, slid in a card and pushed a button – no coins to put into a slot, no pulling the lever, no “jingle” of coins cascading out when you win – just a lot of noise and lights.  I thought it all somewhat hypnotic, but rather boring at the same time.  I also noticed the yelling coming from the various gaming tables such as: roulette, wheel of fortune and the craps table.

My friend decided to play roulette – and being a novice, I decided to watch.  I could not tell what his “system” was as it appeared that he was spreading his chips all over the table without any reason.  But, it was obvious that he was winning – and he was winning appreciably.  However,  instead of getting caught-up in the moment and getting all excited, I found myself feeling rather bored and not interested in playing any of the games – and I started to wonder “why?”

“Why doesn’t playing games of chance and gambling interest me or otherwise excite me?”

I could tell this was going to take a moment to answer and decided to venture towards one of the restaurants for a wine so that I might properly contemplate.

I was into my third glass of Malbec when I had my “Eureka Moment”.  It wasn’t that I didn’t find gambling interesting or exciting.  I did and I do.  It was the magnitude of the bets, the frequency of the trades, and the lack of influence (if not control) over the rules that were not appealing to me.

As you probably know, I own a business – a consultancy firm, in fact.  And in reality, I bet thousands of dollars, perhaps tens of thousands of dollars, perhaps more – almost every single day.  For example:

  • When I hire someone, I bet $20,000 (outfitting, training, sunk payroll, recruitment, etc…) that they will be successful in my business before I actually see any benefit.
  • When I produce an event, I bet $15,000 (or more) per day that the event will draw enough quality people that there might be a down-stream chance of reward.  If I simply attend an event where might materially participate, that bet is between $2,000 and $5,000 (per attendee).  Both of these amounts exclude “soft-dollars” of preparation time.
  • When I pursue an opportunity, I bet anywhere from $2,500 to “no-limit” – never with any guarantee of reward.
  • … The list goes on – but I am sure you get the idea.

So, putting $50.00 on “black” or $1.00 in a slot just does not excite me…

It’s not because the odds at a casino are stacked against the gambler (me).  It’s because I really don’t have control over the rules of engagement – once the chips are plunked-down and the wheel starts spinning, the outcome is no longer in my hands.  This bothers me a great deal.

How to get the most out of your program…

Most people look at the overall return on an investment – be it personally (as in the “markets”) or professionally (in this instance, a Continuous Improvement program).  They look at the budget under their control and the magnitude of the overall return.  If the return achieves their goals, they are satisfied – if it does not, they are displeased.

We already established that I like control (but I am NOT a control-freak – just ask anyone that knows me – HA!).  And due to my nature, I manage my programs somewhat more discreetly than at the “top-level”.  I manage at the individual investment level, the project (or holding) level.

In essence, I approach my programs much like a “Venture Capitalist” would approach the investments in his portfolio.  You see, a Venture Capitalist knows going in that a full 50% of the investments he makes are going to fail and he will be lucky to get any return back.  Another 30% will “tread water”, neither returning a great deal nor losing a great deal.  The final 20% will be “block-busters” which will generate enormous returns.

But Venture Capital Financing manages this risk by using “Tranches” which are tied to “Milestones”.  When a Venture Capitalist firm decides to make an investment in a company, it does not deliver the complete investment commitment to the company all at once, but rather as “progress payments”.  As long as the company is meeting the milestones stated in the business plan, the additional investment will continue.  If the company fails to meet the milestones, the Venture Capital firm has the ability to take remedial action – which can range from complete abandonment of the investment to complete takeover of the company.

As with Venture Capital firms, companies should manage their Continuous Improvement programs as investments and treat them in much the same manner.  This should be a natural occurrence if one is using the DMAIC approach embraced in Six-Sigma – but it is often not the case at the individual project level.  They should reward projects which are meeting or exceeding expectations, and fix or kill-off projects which are failing.

So, what can we do to maximize the return on your investments?

First – The frequency of investing and the consistency of the investment program is more important than the magnitude of the return. 

Make sure you are continually looking for investment (improvement) opportunities in your company (and supply chain).  When you discover a potential candidate project, develop the business case for its pursuit.

  • What do you hope to accomplish?
  • What’s the plan to achieve the expected outcome – including milestones?
  • How much (and what type) of investment is required?
  • What is the expected return on the investment?

Manage the project objectively.  The block-busters will be there, but it’s more important to focus on the projects that are failing to various degrees – and be ready to step-in at the first sign of trouble (i.e. when it misses a milestone).

It is especially important to know when to kill a failing project.  I know this is tough to do because our egos (or friendships) sometimes get in the way, but how many of us have “chased a stock down” in hopes that it will turn-around.  How many times have we been disappointed with the results (more often than not, I would predict).  Always remember, “It’s not personal, it’s business.”

In order to maximize the return on a portfolio, nurture the winners and cull the losers.

Second – Keep it simple.  Complexity kills.

For a plan to have the best chance of success, it must be simple.  The more complex the plan; the more points of failure that exist, the more difficult to manage and measure, and the harder it is to succeed (much less sustain).

For instance, let’s compare two documents;

  1. The Constitution of the United States of America; this is the document that defines how the government of the United States will exist and operate.  It is ONLY FOUR (4)hand-written pages long (plus one “transmittal” page and one “Bill of Rights” page). Versus…
  2. The Internal Revenue Code; This is the document which governs the “whats” and “hows” regarding the assessment and collection of taxes in the United States of America.  It contains 3.4 million words and (printed 60 lines to a page) would be 7500 letter-sized pages long.

Of these, which has an increased likelihood of being effectively and predictably enacted?

Another reason to keep it simple is to achieve “sustainability”.  All too often, a program will start, but then lose its momentum and cease because the burden of deployment is too great. This has less to do with an inability to achieve the objectives and more to do with an artificial compression of the timescale without augmentation with additional resources.

Take “dieting” for instance.  I was overweight last year (tipping the scales last May at 218lbs). I had tried some “diets” in the hope of losing some real weight – but my goals were too lofty (3lbs – 5lbs per week), and the burden of achievement too great (extensive diet and exercise), for me to be successful.  So I would give-up and nothing changed.

When I moved to Germany last July, I modified my lifestyle just a bit.  I was walking (mostly the dog) up to 5 miles per day.  I was also eating a bit more and drinking a bit more water.  After a couple of weeks, I noticed that I had lost a few pounds.  I started monitoring my progress more closely and saw that I was losing about a pound a week.  But now, after 30 weeks, I have lost 30 pounds – and it didn’t bother me a bit doing it.

Keep it simple and sustainable.

Third – Extend and empower the experts.

It is very important to know what you are good at.  But it is arguably more important to know what you are not good at.  A good leader is keenly in touch with where they excel, and they surround themselves with those who excel where the leader is weak – the “experts”.

For the experts to be most effective, they must be empowered to take the actions required to make the dream a reality – and equally be able to bring a failing project to an end without fear of reprisal.  They must not be set-up for failure – defined as; having accountability and responsibility, but without authority.

Here is the tough part – to be effective and successful, these experts will not be from within the department (if the program is at the department level), or the division, or the company (if the program is from the division or company levels respectively).  For maximum results, the experts will be outsiders who have “fresh eyes” for the challenge and no personal ties to those with whom they are to be working.  For a more detailed reason why this is the reality, you can read my article on Guerilla Transformation.

The organization will build a cadre of these “change agents”, where their influence and effects can be leveraged exponentially throughout the company and its supply chain – until Continuous Improvement becomes Deliberate Improvement.

Surround yourself with the best you can find.  If you find that you don’t trust them to do their job, then you know they are not the best – keep looking.

By re-orienting your thinking and expectations from the “portfolio” mentality towards a focus on the “individual investments / projects” requires a change in discipline which will undoubtedly feel unnatural.  However, in order to maximize your portfolio return, you have to know when to cut and run and when to double-down – and of the two, it’s more difficult to cut and run – but do it you must.

 

Joseph F Paris Jr is the Chairman of the XONITEK Group of Companies.  With over twenty years as entrepreneur, academic and professional instructor, and strategic consultant – he is a champion of Operational Excellence (Lean Six-Sigma and Leadership) who has devoted himself to increasing stakeholder-value for his clients and constituents.

Contact him at parisjf@xonitek.com

Full-Biography, Linked-In ProfileBlog

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