The Trib Misunderstands Management

In its recent editorial on the OHSU Tram debacle and the botched firing of a key manager, the Portland Tribune gets it very wrong.

The Trib seems to think the key lesson here is the need to "better manage and protect relationships among the business community, its own employees, nonprofit organizations and other government agencies."

Not even close. Commissioner Sam Adams' attempt to force out Vic Rhodes was based on his belief that Rhodes had lied to the City Council about the project's costs and risks. The principle lesson is on the need for managers like Adams to be able to rely on staff to be honest and candid, and to hold them accountable if they are not.

The breakdowns that occurred with City's and the Tram Board's oversight of the project -- actually four separate breakdowns -- have nothing whatever to do with 'managing or protecting relationships.' (Put away the guitar and douse the campfire.)

Big projects like the Tram have some very specific risks, and managers are on the hook to understand and mitigate those risks. Neither the City nor the Tram Board did so successfully. As Charles Roxburgh writing in the McKinsey Quarterly puts it, there are some very common mistakes that managers make in backing big, strategic initiatives like the Tram - the science of behavioral economics has shown that the human brain is prone to a number of common errors in judgment that are relevant when evaluating strategies.

Here are the four mistakes made in the Tram project so far:

1. Overoptimism - assuming that building a tram larger and longer than any other ever built before would be easy to estimate accurately, underestimating the risk of the technical challenges. No engineering feasability study was even done before the design competition started, according to Rhodes.

2. Mental Accounting (one of Richard Thaler's contributions to behavioral economics) - the City's direct financial exposure to the project was relatively fixed at around $3.5 million. Overruns would be covered by others (OHSU, PDC, taxpayers, etc.) whose money seems less "real" to City employees. This led them to greater laxity and greater risk-taking, as well as less oversight.

3. Anchoring - an effect where exposure to an early number tugs people's estimates toward that number. According to The Oregonian, Rhodes was accused of suppressing key information in order to provide the City Council with a false Tram cost estimate of $15 million. That estimate became a rallying point for the project. The more realistic cost of over $45 million should have been obvious even then.

4. The "sunk cost" trap - throwing good money after bad. Developer Homer Williams was quoted saying that the Tram project had "passed the point of no return" - meaning that, no matter how much more it cost, the project could never be canceled, because a certain amount of money was already sunk into the project.

Each of these errors is one managers can expect to face, and City Councils should too. Each one of these errors can be mitigated if one takes it seriously and puts in place the right planning structures and procedures.

For example, for overoptimism, score the project based on its cost, timeline, level of new technology, and staff expertise. Large and long projects with high costs that are outside staff's experience are much riskier than small, fast, cheap projects that are done routinely. For these large projects, have a formal risk assessment with much broader parameters and test it over many more scenarios (i.e. steel price fluctuations; technical glitches). For large strategic initiatives, require three alternatives be presented using different levels of technical risk. (To this day, no alternatives to the Tram have even been voiced.)

To resist sunk-cost errors, establish "gating" criteria that the project must pass through or be killed automatically, and have the discipline to stick to it.

Managers with responsibility for large and risky projects like the Tram have an obligation to understand these risks and take mitigating steps. The City of Portland should retrofit all its current projects - including the Tram - with mitigation strategies.

And employees who lie to their bosses about the costs and risks of projects should be fired.