Your IT Project: Is It Riskier Than You Think?

Recent research published in the Harvard Business Review shows surprisingly high numbers of out-of-control tech projects, ones that can sink entire companies and careers. Read what is recommended to be in the 20% of projects that succeed.

 

Top managers at Levi Strauss thought revamping the information technology system seemed like a good idea. The company had come a long way, but its IT network was outdated and a mix of incompatible country-specific computer systems. Executives decided to migrate to a single SAP system and hired a team of consultants to lead the effort. The risks seemed small: the proposed budget was less than $5 million, but very quickly hell broke loose.

Walmart, one major customer, required that the system interface with its supply chain management system, creating additional hurdles. Insufficient procedures for financial reporting and internal controls nearly forced Levi Strauss to restate quarterly and annual results. During the switchover, it was unable to find orders and had to close its three U.S. distribution centers for a week. The company took a $192.5 million charge against earnings in the second quarter of 2008 to compensate for the botched project and the CIO was forced to resign.

A $5 million project that leads to an almost $200 million loss is a classic “black swan,” a term coined by a Harvard Business Review colleague Nassim Nicholas Taleb, to describe high-impact events that are rare and unpredictable but in retrospect seem not so improbable. What happened at Levi Strauss occurs all too often and on a much larger scale. IT projects are now so big and touch so many aspects of an organization, that they pose a singular new risk.

Mismanaged IT projects routinely cost the jobs of top managers and have sunk whole corporations, even cities and nations are in peril. The CEOs of companies undertaking IT projects should be acutely aware of the risks. It will be no surprise if a large, established company fails in the coming years because of an out-of-control IT project, in fact, data suggests that one or more will.

Harvard Business Review reached this bleak conclusion after conducting the largest global study ever of IT change initiatives. They examined 1,471 projects, comparing their budgets and estimated performance benefits with the actual costs and results. Most, like the Levi Strauss project, incurred high expenses (the average cost was $167 million, the largest $33 billion) and many were expected to take several years.

The True IT Pitfall

When the Harvard study broke down the projects’ cost overruns, they found the average overrun was 27%. By focusing on averages instead of the more damaging outliers, most managers and consultants have been missing the real problem. Fully one in six of the projects studied were a “black swan,” with a cost overrun of 200% on average, and a schedule overrun of almost 70%. This highlights the true pitfall of IT change initiatives: It’s not that they are particularly prone to high cost overruns on average, as management consultants and academic studies have previously suggested, it’s that an unusually large proportion of them incur massive overages (a disproportionate number of “black swans”).

The Harvard study found successful project leaders followed these practices:

1. Stuck to the schedule
2. Resisted changes to the project’s scope
3. Broke the project into discrete modules
4. Assembled the right team, including IT experts from the company, outside experts, and vendors
5. Prevented turnover among team members
6. Framed the initiative as a business endeavor, not a technical one
7. Focused on a single target, “readiness to go live,” measuring every activity against it

Some of the pitfalls of tech projects are old ones. For example, more than a decade ago, Hershey’s shift to a new order-taking and fulfillment system prevented the company from shipping $100 million worth of candy in time for Halloween, causing an 18.6% drop in quarterly earnings. Harvard Business Review’s research suggests that such problems are now occurring systematically and the biggest ones typically arise in companies facing serious difficulties (eroding margins, rising cost pressures, demanding debt servicing, etc.) which an out-of-control tech project can fatally compound.

Local Success Story

Having expert technical guidance was key to avoiding the potentially fatal resource drain of a black swan for an energy consulting company. Software Consortium (SCI) helped them understand the ramifications and realities of developing a new software solution, and a clear path to success by using SCI's Fixed Budget Dashboard and innovative team best practices.

The client company provides energy auditing services and technologies that optimize consumption for its clients’ real estate assets. They wanted to develop a software application that would integrate data from various smart meters, LEED databases and other points of the energy footprint to generate data to help consumers understand current costs and how the company’s recommendations would benefit financially and environmentally.

SCI used its SC Cost Calc^TM technology and its ability to engage business decision-makers in making the highest value business product decisions. SCI then architected a creative and flexible solution that used Amazon’s cloud service, to meet the customer's budget and security needs.  SCI is frequently called upon to help companies--as core members of the client's team or as the entire solution team--discern and execute smart technology decisions, ensuring projects are in the rare 20% of projects that succeed.

Tech Projects Aren’t the Only Problem

“It’s not enough to just manage single projects well,” the researchers at Harvard Business Review report, “Managers need to choose the right projects, exploit synergies between them, and terminate unnecessary projects.” The bottom line: Although the basic rules of project management may seem simple, most companies are unable to follow them since other group decision making complexities seem to enter the picture.

• 67% of companies failed to terminate unsuccessful projects
• 61% of managers reported major conflicts between project and line organizations
• 34% of companies undertook projects that were not aligned with corporate strategy
• 32% of companies performed redundant work because of unharmonized projects

SOURCE: The Art of Project Portfolio Management by Meskendahl, Jones, Kock, and Gemunden.

Avoiding Black Swans

Recommendations from the study are that any company that is contemplating a large technology project should take a stress test designated to assess its readiness. In addition, leaders should ask themselves two key questions as part of IT black swan management: First, is the company strong enough to absorb the hit if its biggest technology project goes over budget by 400% or more and if only 25% to 50% of the projected benefits are realized? Second, can the company take the hit if 15% of its medium-sized tech projects exceed cost estimates by 200%? These numbers may seem comfortably improbable, but the research shows, they apply with uncomfortable frequency.

Even if their companies pass the stress test, considerations for managers are to take other steps to avoid IT black swans.  Optionally,  they can break big projects down to those of limited size, complexity, and duration; recognize and make contingency plans to deal with unavoidable risks, and avail themselves of the best possible forecasting techniques.

As global companies become even more reliant on analytics and data to drive good decision making, periodic overhauls of their technology system are inevitable, but the risks involved can be profound and avoiding them requires top managers’ careful attention.

 

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