Board direction for large IT projects is essential

IT projects are now so big, and they touch so many aspects of an organization.

Mismanaged IT projects routinely cost the jobs of top managers and have sunk whole corporations.

We have also seen many South African cities and government departments in peril due to  IT project disasters.

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, the following data suggests that one or more will.

 

King III, Chapter 5

“The board should oversee the value delivery of IT and monitor the return on investment from significant IT projects.”

Directors need to take “due care” when directing such projects in their organisation.

 

Reasearch

Bent Flyvbjerg (BT Professor and founding chair of major programme management at Oxford University’s Saïd Business School) and Alexander Budzier (a consultant at McKinsey & Co. and doctoral candidate at Saïd), examined 1,471 projects, comparing their budgets and estimated performance benefits with the actual costs and results.

They included many types of systems, from enterprise resource planning to management information and customer relationship management systems.

Most incurred high expenses—the average cost was $167 million, the largest $33 billion—and many were expected to take several years.

 

Black Swans

The average IT project overrun was 27% but 67% of the projects studied was a black swan

• A cost overrun on average was 200%
• A schedule overrun of almost 70%.

This highlights the true pitfall of IT change initiatives:

It’s not that they’re 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—that is, there are a disproportionate number of black swans.

By focusing on averages instead of the more damaging outliers, most managers and consultants have been missing the real problem.

 

Avoiding Black Swans

Flyvbjerg and Budzier advise leaders to:

1. Ask two key questions

1. 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?
2. Can the company take the hit if 15% of its medium-sized tech projects (not the ones that get all the executive attention but the secondary ones that are often overlooked) exceed cost estimates by 200%?

“These numbers may seem comfortably improbable, but, as our research shows, they apply with uncomfortable frequency.”

2. Break big projects down into ones of limited size, complexity, and duration;

3. Recognize and make contingency plans to deal with unavoidable risks; and

4. Use the best possible forecasting techniques, for example, “reference class forecasting,”. This is a method based on the Nobel Prize–winning work of Daniel Kahneman and Amos Tversky. These techniques are widely used in business, government, and consulting and have become mandatory for big public projects in the UK and Denmark.

 

As companies become even more reliant on technolgy, periodic overhauls of existing systems are inevitable. The risks involved can be profound, and avoiding them requires careful attention.

 This blog was based on an article by Bent Flyvbjerg and Alexander Budzier.

 

GovN provides you with what you need to address King III

 

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