Monthly Archives: September 2012

Credit, Trust and Emotions

Last night we attended the Deakin University, Richard Searby Oration, delivered by Dr Guy Debelle, Assistant Governor (Financial Markets), Reserve Bank of Australia. His topic was: Credo et Fido: Credit and Trust.

The 2012 Oration explored the importance of credit and trust within the financial system and how the breakdown in trust post 2007 and the Global Financial Crisis (GFC) is severely hampering the global recovery.

Debelle’s hypothesis is that there is no credit without trust because there is always asymmetrical information in a loan transaction, the borrower always knows more about his/her/its financial situation and intentions than the lender and trust is needed to bridge this knowledge gap and allow the loan to be made.

This is as true of a depositor lending to a financial institution as it is of a bank lending to a borrower or importantly one financial institution lending to another institution. When trust breaks down, the lending process slows up or stops altogether. For more on the value of trust see: WP1030_The_Value_of_Trust

However, trust implies risk, the root cause of the GFC was overconfidence, leading to lax lending practices, supported by a lack of effective due diligence, leading to a chronic underpricing of risk. This allowed highly unethical, if not criminal practices to develop exponentially with institutions offloading risk to other institutions at a fraction of the real price. This complacency and ‘lazy trust’ allowed vast ‘bubbles’ of underpriced risk to develop across the whole financial sector. When the finance system was eventually forced to take a severe look at its situation, trust evaporated, credit dried up and the GFC destroyed value around the world.

The sovereign states (ie, governments) as lenders of last resort were in many cases unable to counterbalance the situation because trust in their ability to repay debt also evaporated. Pricing risk requires a reasonable degree of confidence that the parameters of the ‘unknown’ are knowable and a reasonable probability can be assigned to a defined risk exposure. Post GFC the breakdown of trust and confidence in financial markets has lead to uncertainty. When lenders ‘don’t know’ what the risk is they cannot price the risk, set a reasonable premium and use the information to strike a loan rate. If lender cannot set an interest rate for a loan, there is no loan (or the rates are exorbitantly high and the loan periods very short).

On-going banking scandals in Europe and the USA are continuing to erode trust and slow the rebuilding, despite money supply being expanded by the central banks. Having money is no good if you cannot trust anyone to lend it to.

The thread of argument that can be drawn from the above is that access to the credit needed to fund economic growth is based on a large proportion of a society having enough confidence in their financial systems for a reasonable degree of pragmatic trust to be extended by lenders to borrowers (and the borrowers having sufficient confidence in the situation and system to seek loans). This is as much a function of the underlying emotional settings within a society as the actual facts of the situation.

Australia is an interesting example. The GFC had minimal overall effect on the economy due to much tighter fiscal and banking policies, supported by swift government action. The current situation is also good with relatively low debt and the Reserve Bank has significant options open to keep the economy growing.

The overall strength of the economy was outlined in a speech entitled ‘The Glass Half Full’ given by Glenn Stevens’, Governor of the Reserve Bank of Australia (RBA), in his address to the American Chamber of Commerce (SA) AMCHAM Internode Business Lunch held in Adelaide on the 8 June 2012 (see:

One of the key charts presented by Stevens shows the inflation adjusted per capita GDP in Australia has hardly missed a beat – the GFC had a flattening effect but overall business conditions for the last 5 years have remained basically the same and are improving.

GDP = Gross Domestic Product and is directly correlated to the spending power per person (compounded by the growth in the Australian population). The only significant change highlighted in Steven’s report was a shift from an unsustainable growth in personal borrowings back towards a more sustainable savings rate which under any normal circumstance would be seen as good economic sense, particularly given the disasters in places like Ireland, Spain and Iceland caused by excessive borrowing.

So given the basically solid performance of the Australian economy, one would expect a similar trend in business confidence?? Unfortunately this is not the case:

A survey of business confidence by DBM Consultants shows confidence crashed in the period between 2007 and 2009 and continues to ‘flat-line’ with the vast majority of businesses being concerned about the economy. This flows through into low expectations for increasing employment and taking on borrowings (see:

The question is why is there such as big disconnect between the financial facts as presented by the RBA and the emotional distrust expressed by business in the DBM report?

My feeling is the key driver is the almost unrelenting stream of negative reporting in the press focusing on ‘bad news’ stories such as plant closures rather than good news stories such as the overall growth in employment (even in the manufacturing states such as Victoria), supported by a similar campaign by the federal opposition for short term political gain. This combination of unrelenting negativity will undoubtedly lower the level of optimism in the community (shown by numerous surveys) and lower the levels of trust in the government which as the ‘lender of last resort’ flows through into the financial and business communities.

Given the press appear to believe bad news sells papers and the opposition has a vested interest in winning the next election, both legitimate objectives, one wonders what needs to happen to start the shift in confidence highlighted as essential in Dr Debelle’s oration? The belief highlighted in the DBM report above has to be having a direct effect on the rate of growth in the economy because businesses are not investing, not training staff and not employing at the levels they could if there was more confidence – to an extent, the emotions are self-fulfilling.

As individuals we cannot do much at a national or international level, but we can learn from the wider world. When dealing with your team and/or communicating with stakeholders a proper balance is needed between achievements and issues. Focusing only on bad news and you will damage future prospects – unrelenting negativity is likely to be self-fulfilling; whilst unfounded optimism is a recipe for disaster if you ignore prudent good practice.

Advising Upwards for Effect

The only purpose of undertaking a project or program is to have the deliverables it creates used by the organisation (or customer) to create value! Certainly value can be measured in many different ways, improved quality or safety, reduced effort or errors, increased profits or achieving regulatory compliance; the measure is not important, what matters is the work of the project is intended to create value. But this value will only be realised if the new process or artefact ‘delivered’ by the project is actually used by the organisation to achieve the intended improvements.

The organisation’s executive has a central role in this process. There is a direct link between the organisation’s decision to make an investment in a selected project and the need for the organisation to change so it can make effective use of the deliverables to generate the intended benefits and create a valuable return on its investment. The work of the project is a key link in the middle of this value creation chain, but the strength of the whole chain is measured by its weakest link – a failure at any stage will result in lost value.

In a perfect world, the degree of understanding, knowledge and commitment to the change would increase the higher up the organisational ladder you go. In reality, much of the in-depth knowledge and commitment is embedded in the project team; and the challenge is moving this knowledge out into the other areas of the business so that the whole ‘value chain’ can work effectively (see more on linking innovation to value).

To achieve this, the project team need to be able to effectively ‘advise upwards’ so their executive managers understand the potential value that can be generated from the initiative and work to ensure the organisation makes effective use of the project’s deliverables. The art of advising upwards effectively is the focus of my book ‘Advising Upwards’.

An effective Sponsor is a major asset in achieving these objectives, providing a direct link between the executive and the project or program. Working from the top down, an effective sponsor can ensure the project team fully understand the business objectives their project has been created to help achieve and will work with the team to ensure the project fulfils its Charter to maximise the opportunity for the organisation to create value.

Working from the bottom up, new insights, learning and experience from the ‘coal face’ need to be communicated back to the executive so that the overall organisational objectives can be managed based on the actual situation encountered within the work of the project.

The critical importance of the role of the sponsor has been reinforced by numerous studies, including the PMI 2012 Pulse of the Profession report. According to this report, 75% of high performance organizations have active sponsors on 80% of more of their projects (for more on the value of sponsorship see: Project Sponsorship).

If you project has an effective sponsor, make full use of the support. The challenge facing the rest of us is persuading less effective sponsors to improve their level of support; you cannot fire your manager! The solution is to work with other project managers and teams within your organisation to create a conversation about value. This is a very different proposition to being simply ‘on-time, on-scope and on-budget’; it’s about the ultimate value to the organisation created by using the outputs from its projects and programs. The key phrase is “How we can help make our organisation better!”

To influence executives within this conversation, the right sort of evidence is important; benchmarking your organisation against its competitors is a good start, as is understanding what ‘high performance’ organisations do. PMI’s Pulse of the Profession is freely available and a great start as an authoritative reference.

The other key aspect of advising upwards is linking the information you bring into the conversation with the needs of the organisation and showing your organisation’s executive how this can provide direct benefits to them as well as the organisation.

In this respect the current tight economic conditions in most of the world are an advantage, organisations need to do more with less to stay competitive (or effective in the public service). Developing the skills of project sponsors so that they actively assist their projects to be more successful is one proven way to achieve a significant improvement with minimal cost – in fact, if projects are supported more effectively there may well be cost savings and increased value at the same time! And what’s in it for us as project managers? The answer is we have a much improved working environment – everyone wins!!

New Governance & Management Systems White Paper

Our third White Paper focused on governance, defining the differences between management and governance, is now available for downloading. It incorporates the thoughts in our last two major posts on this topic updated with ideas developed during the ISO TC 258 Governance Study Group meeting in Pretoria

Note: these are our thoughts not the ISO Study Groups, although hopefully there will be a fair degree of consensus – to see our full series of post select ‘Governance’ from the Category option or: Click Here.

The new WP 1084 Governance Systems & Management Systems looks at the different but interdependent functions fulfilled by an organisation’s governance system and its management system. (Download WP 1084).

The other two White Papers in this series are:

  • WP 1033 focused on Corporate (or Organisational) Governance (Download WP 1033).
  • WP 1073 that deals with the subset of organisational governance focused on governing Projects, Programs and Portfolios, PPP Governance (Download WP 1073).

From our perspective, the next couple of developments in this space will be internal to the ISO Study Group. The intention of the group is to have its report completed by March 2013 and based on the findings achieve consensus on the way forward, hopefully to develop a formal ISO specification or standard dealing with the important subject of PPP governance.

Time Management Presentation – WITS University Johannesburg

Yesterday afternoon, I took time out from the work of the ISO TC 258 study group hosted in Pretoria, by the South African Bureau of Standards (SABS). The primary purpose of my trip to SA is to contribute to the work of this group, studying the current state of understanding of the concept of governance of project, program and portfolio management with a view to the possible development of an ISO standard. The ‘time out’ was to present a paper on ‘time management’ at WITS University; but this simple diversion turned into a fascinating day……

Apart from the storms hail and floods, a highlight of the visit to the university was a too quick tour of the recently opened ‘Origins Centre’

The centre showcases recent South African discoveries of two pieces of engraved ochre and, more than 60 marine-shell beads dated at 75 000 years. Theses finds, together with archaeological evidence emerging from other parts of Africa, suggest that symbolic thought and other forms of behaviour regarded as characteristic of modern human beings, began in Africa as far back as 200 000 years ago. This combination of palaeoanthropological and archaeological evidence confirms the hypothesis that fully modern human beings evolved in Africa first, and then left the continent to populate the entire world.

The two overwhelming impressions I took away from the displays were:
• Firstly the intrinsic oneness of mankind – the differences are minute compared to the common bonds and heritage.
• The second was the ever accelerating rate of change in the technologies we use. Every ‘new age’ of development occupied a fraction of the time of its predecessor starting with the ‘old stone age’ which lasted over 2 million years. The ‘middle stone’ age lasted some 250,000 years, followed by the ‘new stone age’ which lasted less than 10,000 years and finished with the start of the modern era some 5000 years ago – the modern era includes the Bronze and Iron ages, leading through to modern times.

After considering the ‘historical aspects of time’ it was onto the ‘management of time’ and planning the future… The presentation is on our website at The three underlying messages in the presentation are:
• Plan what you know ‘budget the rest’
• Useful schedules are useful because they are used (ie, effective communication media)
• The future is unpredictable so expect change.

The last of these points was brought home immediately after the lecture concluded. My hosts had arranged a dinner at a local restaurant; however, the afternoon storms had flooded the bridge leading to the restaurant and it took a number of attempts to find a way around – the 8:00pm meal started nearer to 9:00pm! Good communication and adaptability led to a great evening but the original plan had to be revised to accommodate reality.

The pride passion and hospitality of South Africans is amazing I certainly hope to be able to return at some time in the not too far distant future.