Three Approaches to Projects

Networks, markets and psychology

Over the last decade a wide range of firms, organisations and industries have done or are in the process of restructuring themselves into some form of project-based production, following the lead of industries like construction, defence contracting, consulting and software that have traditionally used this form of organisation. At the same time the idea of what constitutes a project, using distinctions such as hard/soft, standardised/complex, mega/other and so on, has greatly expanded.

If project based production makes an important contribution to economic output that is a reason to study it, applying the methods and tools available. Given their multifaceted nature, it is obvious that ideas from many different fields of inquiry can be usefully applied to a range of issues found in projects and their characteristics. From economics there are interesting, relevant ideas that have come out of research across a diverse range of topics, including organisational and regulatory economics, property rights and contracts, governance and the principle-agent problem.

One way of harnessing this diversity is to use some of the characteristics of projects as a mechanism to group ideas together. The method used here is based on three broad approaches to understanding projects: projects as networks; projects as markets; and the psychology of projects:

1. Projects as networks covers fields including incomplete contracts and procurement, collusion and corruption, supply chains and sub-contracting, lean production, integrated teams and temporary organisations.
2. There is both a market for projects, and a project as a temporary market. Topics in this area include market characteristics and structure, market power and monopsony, auctions, bidding and information, Williamson’s fundamental transformation and asset specificity, and the ratchet effect in contracting and tendering.
3. The psychology of projects is based on recent developments in behavioural and experimental economics, in turn largely based on Kahnemann and Tversky’s work. Optimism bias, bounded rationality, incentives and Flyvberg’s delusion and deception view are examples. Underpinning these are the principal-agent problem, moral hazard and information asymmetry.

The fields ideas can be drawn from, that are outside the general project management literature, include management and organisation studies, psychology and behavioural economics, network analysis, lean production, legal and institutional research, and transaction cost economics. Economic theory can be applied to a range of issues found in the procurement and contracting of projects. Thus topics such as competitive and oligopolistic markets, auction theory, game theory and buyer and supplier power are relevant.

Another example is the economics of contracts. This field includes the role of incomplete contracts in self-enforcing relationships, the design of contracts, economic reasoning and the framing of contract law, and the contract as economic trade. It overlaps transaction cost economics and its application to property rights, agency theory, moral hazard and incentives. Other related topics are norms and the theory of the firm, allocating decision rights under liquidity constraints, authority and flexibility in contracts, and theories of contract regulation.

Many of these topics are also found in New Institutional Economics and work on the econometrics of contracts and markets. Because projects can be seen as a collection of contracts, written and unwritten, all this is clearly relevant. Another is the role of legal and regulatory structures in institutional economics, which emphasises the importance of a stable and predictable environment for entrepreneurs and businesses, here taken to be the clients and contractors involved in the business of delivering projects.

Where the study of how economic activity is organized fits is a grey area. It exists somewhere between micro and macroeconomics, and is primarily interested in imperfectly competitive markets, like those found in professional services. In these sorts of markets reputation, relationships, regulation and risk are major factors, all of which have been extensively studied.

What the diversity of ideas collected here provides is, in many ways, the overall context and framing of a project. In the same way as a business plan starts with a scan of the environment and a SWOT analysis, a project could have a context scan of the network, market and behavioural aspects. That’s not to say these factors are not all part of professional project planning. Obviously they are. Rather, the economic approach shifts the focus to questions about how best to design and structure a project from the point of view of organising production and fulfilling a social or economic role. It’s a functional approach that has a limited amount to say about managing production or specific PM decisions.

Projects as a Form of Production

How Production Theory Links to Project Management

In the previous post the idea that a project might be considered as an internal, temporary micro-market post was considered. An economic approach emphasises both the market for projects and projects as markets, and leads to a different approach to the analysis of projects. This different approach is quite well suited to the growing importance of the economic role of projects in the modern economy.

This post is concerned with another aspect of the economics of projects. The starting point is the idea of a project as a form of production, in the economic sense of combining a number of factors or resources to create output. Here, a representative firm selects the technology to use, organises and manages the production process to maximise efficiency and deliver output.

The economic theory of production that developed after the mid-18^th century was one of the main topics of classical political economy, firstly by the French physiocrats and their theory of agricultural rents and revenue, and later by Adam Smith and his analysis of the emerging factory system and profit. After the marginal revolution in economics in the second half of the 19^th century, production theory adopted Alfred Marshall’s framework of optimal allocation of scarce resources.

In the neoclassical theory of production, the starting point is a set of physical technological possibilities represented by a production function. The output of a production process is determined by the choice of technology and the flow of inputs used, the flows of capital services, labour services, and services from land, energy and raw materials. The task of a firm and its managers is to combine all these into a flow of output. 

This economic model of the firm as a black box, turning inputs into outputs, left many unanswered questions. Production processes vary widely within and between industries, and across regions and countries. Industry concentration and structure, and the regulation of market power, have become increasingly important. The data we get from the SIC (System of Industrial Classification) comes with many qualifications.

During the 20^th century answering these questions led to substantial new sub-fields in organisational and industry economics, investigating the boundaries and management of firms and industries. The single topic that attracted most theoretical research, however, was the choice and application of technology, as this had long been recognised as the driver of productivity and economic growth. Technology, in turn, is embodied in the capital used as a resource in the production process.

Many aspects of project management seem to be about resource allocation and delivery of a product (i.e. the project), the economic-orientated set of activities found in a production model. Although a wide range of management tools and methods are used in the course of a project, over the conception to handover cycle, the emphasis is actually on the way that the production process is managed. Thus the central role given to work breakdown structures, schedules and risk management. Further, the generic nature of project management supports this view. There is specific knowledge required for delivering construction projects, for example, but the broader set of PM skills are not industry specific and are about getting the various processes needed for a particular project right.

Also, many decisions in PM are often about the technology to be used. The substitutability of capital (how much equipment) and labour (how many workers) is apparent in any office and on every construction site. Economic theory gives technology the key role in determining efficiency, with management of the production process determining the level of efficiency. Thus a link between PM and the economic theory of production is found. These are both process-based and concerned with production technology choices.

Economics Rules by Dani Rodrik

 

This is a great book, and given the post financial crisis criticisms of mainstream economics it is relevant and timely. It is also accessible and easy to read for anyone interested in how economists actually think and work, rather than the stereotypes of unrealistic assumptions and ideological biases typically found. Most of the topics would be understood by interested non-economists, and be particularly useful for people who are unclear about how economics progresses by developing new models that generally complement, not replace, older ones.

The first part of the book explains economic thinking, and the role of the models that economists use. The basic idea is that there are many valid models, and the challenge is to know which is applicable to a specific problem or issue. This is the main point of the book and is a message worth repeating: different models have different applications, there are no wrong models, only badly and inappropriately applied models. Rodrik thus regards contemporary economics as a collection of models, not as single grand theory (or a quest for one). The economist’s craft lies in knowing which model is appropriate to the task at hand.

Another important point is that all the big, ultimate answer type models have proved to be disappointing when confronted with economic conditions they do not incorporate. Thus Keynesian models didn’t work in the 1970s with stagflation, and new classical models led to the 2007 financial crises and had little to contribute to policy responses. It is not necessary to discard these models, but there are others that are more appropriate for the circumstances. There are a number of good examples of how this works in practice.

Rodrik’s writing style explains things in a way that is both illuminating and sensible. There were moments when I found myself seeing economics from a new perspective, something that does not happen often, and there were many new ideas I hadn’t come across before. Also, there was nothing I disagreed with, despite the book’s wide scope and the range of topics covered. I recommend it to anyone interested in economic policy, or economic theory.

Rodrik’s blog page is at http://rodrik.typepad.com/dani_rodriks_weblog/

A video of him presenting the ideas in Economics Rules is at https://www.youtube.com/watch?feature=youtu.be&t=29m&v=Yxbcb7hxZP0&app=desktop