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BLOG: Failing to assess the costs of failure

Joanne Flinn | Nov. 28, 2012
Would you be pleased with a 27.5% write-off on your project portfolio?

Projects are investments, yet are they assessed as such? A single project is either performing or not. It adds value to the portfolio or not. The failure to assess the costs of failure represents a major opportunity for business improvement.  

I'√e spoken with Alex Budzier of Oxford University whose research is published in Sept '11 Harvard Business Review. He showed that one in six IT projects cost two to four times what is expected, and that nearly 50 percent of such projects were underfunded.

Under appreciated, these facts show a downward spiral. One project underperforms, taking funds and energy from the next project. Performance declines.

A single failing project costs time, money, people and opportunity. If the project is big, it can wipe out the benefits of hundreds of smaller successful projects. It's the maths of portfolio return on investments.

As a financially inclined person, I calculated the project portfolio return with a yield formula using several project portfolios as a benchmark.

The numbers were shocking. 27.5 percent written off.

I asked a CPA friend to check it. He said: "Yes, that's the data, that's the result. Correct." As a human and a business owner/executive, it is worrying.

Let's keep it simple: these benchmarks are predictive: a $1,000,000 project is very likey to have a budget overrun of $275,000.  This likely budget overrun (aka 'incremental budget') gets proportionally bigger as projects get bigger. This changes a business case. If a project does not have what it needs to deliver, it's even more likely to fail.

It's predictable. Twenty years of data.

Here are the key points on business case, projects and investment:

  • - Business cases need to consider this risk profile; two to four times over budget is materially dangerous for big ticket projects in most businesses
  • - Success or failure is predictable upfront
  • - Early warning systems can identify what projects (and budget) are at risk, and what to do.

Looks like it's time for a check-up of projects, upfront.

Joanne Flinn is author of ‘The Success Healthcheck for IT Projects’ (Wiley 2010).

 

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