Why Your IT Project May Be Riskier Than You Think
I have recently stumbled across a very interesting article titled "Why Your IT Project May Be Riskier Than You Think" published by Bent Flyvbjerg and Alexander Budzier.
I am a big fan of professor Flyvbjerg and his work and as a result needless to say I read this article with great interest. The article describes the phenomenon called the "black swan projects" or as he puts it "high-impact events that are rare and unpredictable but in retrospect seem not so improbable". In other words, these are the endeavours that are vastly over budget and sometimes so bad, that they kill the companies that conceived them. Some of the examples are:
- Levi Strauss' migration to the SAP system (original budget - $5 million, actual cost - $192 million)
- Hong Kong’s airport's IT system upgrade (losses of $600 million)
- Hershey’s a new order-taking and fulfillment system (losses of $100 million causing an 18.6% drop in quarterly earnings)
- Kmart's IT modernization project (original budget - $1.4 billion, actual cost - $2 billion; led to company's bankruptcy)
Professor Flyvbjerg further states:
"The average overrun was 27%—but that figure masks a far more alarming one. Graphing the projects’ budget overruns reveals a “fat tail”—a large number of gigantic overages. Fully one in six of the projects we studied was 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’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."
The article proposes the following steps to be taken in order to address this challenge: