My previous article about the compounding effect of changes was the first in a series to explore different mental models and how to apply them in Configuration Management. This article will focus on two mental models that can influence our decision-making around changes: Opportunity cost and the Lollapalooza effect.
Opportunity cost
Opportunity cost is the mental model that explains how you can only spend your time and money once, and therefore you will not be able to achieve the benefits from the other investment you could have made. In the below example based on the Youtube video from The Swedish Investor – Charlie Munger: Mental Models for the Rest of Your Life (PART2), you can see that when you bought a specific stock at the beginning of year x for $10,000. And at the end of the year, you lost 10% or $1000, while the S&P 500 for the same year resulted in a 17.9% gain. In other words, if you invested $10,000 in the S&P 500, you would have earned $1790. Therefore the opportunity cost is the $1000 you lost plus the $1790 you missed, which equals $2790.
This can also be applied when looking at the backlog of changes in their expected business case and actuals. If you choose to invest in change 1, you cannot spend the same time and resources on change 2. This means we either need additional resources and budget or we have to prioritize the right changes. This is nothing new; it is also why changes require an impact assessment before disposition.
Only looking to one year might skew the results of the real opportunity cost because if the returns for change 1 increase every year, every sold unit keeps on providing returns, as it requires a subscription. While for change 2, the returns remain stable year on year. For instance, you replaced a machine in your production line to reduce energy consumption. But for year one, Change 2 is the better opportunity, while Change 1 will become the better opportunity if you also count the second year. In the below example, if we combine the returns for years 1 and 2, the opportunity cost is $200 if we choose to go with change 2.
The quality of the impact assessment and our capability to translate this into a business case, including all relevant risks, is critical for making the right decisions.
But to be successful in making the right choices, you also need to understand the Compounding effect of changes. That means dependencies between changes are an essential component to define the possible paths to implementation as described in Dependencies limit the possible sequence of events.
Suppose you choose two changes that can only be implemented one after the other because of resource constraints. In that case, you might want to figure out how to utilize the available resources best to optimize the business case realization.
Additionally, when choosing the changes to invest in, we must be aware of the potential Lollapalooza effect.
Lollapalooza effect
Charlie Munger defined the Lollapalooza effect as the:
Confluence of psychological tendencies in favor of a particular outcome.—Source: Peter Burns on MediumWhen these tendencies combine, they don’t just add up; each tendency builds off and strengthens the other, creating an exponential instead of a linear result.—Charlie MungerSource: CMQ Investing (paraphrased)
Lollapalooza effect explained by The Swedish Investor.
An excellent example of a negative Lollapalooza effect in the context of configuration management is related to the article I wrote about Ethical Fading eats Configuration Management Principles for breakfast. Ethical fading does not happen when the only pressure you feel is that you need your job to pay the bills. Because if you have a good manager and your company’s leadership invests in their people and a culture of quality and inclusion, even though you might feel some anxiety about your job security, it will not lead you to ethical fading. But if leadership pushes you to take shortcuts and look the other way and you do not feel supported by your peers, ethical fading will lurk around the corner, and when it hits, the consequences can be severe.
Preventing negative Lollapalooza effects
When choosing changes to prioritize, we need to be aware of any cultural and social aspects in the organization that can create the equivalent of a perfect storm in the negative sense—resulting in changes that will haunt you and cause significant damage to the organization in both brand recognition and financial impact. Some changes might be more sensitive to this than others. For instance, changes that deal with safety are more likely to suffer from this than changes that add a new non-safety-related feature. Typically changes that have a cost but not a direct return on investment in the sense of increased revenue (e.g., changes related to regulatory requirements) are often already tagged in one way or another, so it should not be too hard to find them, and monitor them more closely.
During the impact assessment, one can add that because there is no direct return on investment other than complying with regulatory requirements, this potentially can lead to taking shortcuts under time pressure or pressure to cut costs without understanding the long-term impact. Mitigation could be that as part of the change implementation planning, you agree (documented) to the required steps and criteria to move from one step to the next. Changing this agreed approach is possible but will be documented with the requestor(s) and approver(s) by name and function to ensure accountability.
In a highly toxic culture, it is the question if that could be feasible. But in that case, my advice would be to, if possible, look for other opportunities elsewhere.
Creating a positive Lollapalooza effect
Creating a positive Lollapalooza effect is not easy. Still, when an organization fosters their employees, their growth, equity and inclusion, and quality and have a clear vision/mission and live by that vision and mission, chances are that people will feel heard and understood and will likely surprise you with their amazing ideas and innovations.
To read more about the CM Baseline and its components, please check out the previous posts from the CM Baseline series:
- Understanding the Impact of Changes introduced the need for the CM Baseline.
- Connections tell the Story introduced the first component of the CM Baseline, the Business Object Graph.
- Intentions are the desire for new Stories, introduced the second component of the CM Baseline, the Impact Matrix.
- Dependencies limit the possible sequences of events, introduced the third component of the CM Baseline, Dependencies or a.ka. Change Dependencies.
- Timing is Everything, introduced the fourth and last component of the CM Baseline, Implementation Plans.
- 5 Ways a CM Baseline brings value, explores 5 scenarios that bring value.
- One way to organize information for the CM Baseline, proposes a way to model the knowledge graph of the CM Baseline.
Header Photo by Dani García on Unsplash