A moral hazard is a situation where there is a tendency [by a work package manager, for example] to take undue risks because the costs are not borne by the party taking the risk.
And, somewhat related, we are informed that "adverse selection" is described this way:
Adverse selection is a situation where an individual's demand for [relief from risk] is positively correlated with the individual's risk of loss (e.g. higher risks buy more insurance), and the [project manager] is unable to allow for this correlation in the [project plan]
This discussion about moral hazard came up with some of my students in my Agile PM class. We were discussing how tightly to schedule a project.
My thinking: a plan without slack is not really a plan; it's a hope.
Two ways to get slack planned into the project baseline:
- Assume there's always going to be "labor loss"... That is, no one can really work 100% of the time they are schedule to work. It just doesn't ever seem to work that way. From dental appointments to coffee bar chat, some labor is lost. I always estimate 15%
- Put in what I call "pipeline buffers", to allow some "breathing" in the schedule plan. (I may call it pipeline buffers, but others call it critical chain method)
So, now moral hazard: the team knows there is slack built-in. In the agile business, we don't schedule for more than 85% of velocity, and we always put in a zero activity iteration before every release (a release is some number of iteration's deliverables). If the team knows this, it creates a moral hazard. They know they can use the slack without having to pay the price of the longer schedule.
And, that creates the correlation of the adverse selection dilemma: a demand for schedule relief on the one hand, and a correlation with the propensity of work packages and iterations to run over.
What's a PM to do to fight moral hazard? Here are a few ideas:
- Incentives to do good, i.e. pay for performance (or 'show me the money')
- Penalties if the schedule is blown
- Keep the labor loss to yourself; that just happens. No point in offering it up to the general population
- Make it hard to use the buffer time (after all, the PM should be in charge of constraints, not the inmates)