When entrusting your investment funds to a professional fund
manager it would be reasonable to expect that manager to exercise
proper professional skill and competence over your portfolio.
This would include monitoring the investments continually,
taking advantage of market conditions, analyst comment and company
performance to make properly informed decisions.
Why then are these
monitoring disciplines so rarely applied to IT investment
portfolios within most commercial and not-for-profit
enterprises?
IT projects can develop a momentum of their own, leading to
successful implementation and the achievement of value. However, on
too many occasions, such projects eventually run out of steam and
die a lingering death, with value destruction the result.
Need to re-evaluate
Rarely are IT projects subject to regular, objective and
informed re-evaluation during their development lifecycle.
This prevents proper decisions being made on potential
cancellation or rationalisation once it becomes clear that, for
whatever reason, the project is unlikely to deliver the benefits -
and therefore the return on investment - originally envisaged in
the business case.
Sometimes, this is because there is no knowledge that the
assumptions about the business case may have changed adversely. But
all too often it is through a wilful lack of action, even though
the changed circumstances either are known, or should have been
known, to the key decision makers.
Shareholder value all too often is eroded when projects fail to
deliver on expectations. Profit warnings have to be issued because
of the failure of an IT-enabled logistics system or a customer
relationship management initiative.
Warning signs
In many cases, warning signs were available that, had they been
heeded and acted upon at a much earlier stage, could have prevented
the transition from drama to crisis. Such warning signs may
include:
● Change of project sponsor
● Change of project manager
● Significant changes in composition of the project team
● Significant "scope creep" or scope reduction
● Requests for additional funding
● Slippages in system delivery date
● Lack of engagement from business management
● User apathy - or, in extreme cases, outright opposition -
towards the proposed system
● Delayed project status reporting
Why is it so common for IT projects to linger on, even as it
becomes increasingly obvious that many of them should be put out of
their misery?
Sadly, within too many organisations the cancellation of a
project during its development lifecycle is still seen as a sign of
weakness and failure rather than as a sign of management strength
and a willingness to make tough decisions.
This perception of failure, if it still applies within your
organisation, needs to be addressed if waste of resources, erosion
of value within the IT investment portfolio and lowering of staff
morale are to be avoided.
Affirmative management action, if taken at the right time, can
head off more serious problems later. The "it will be all right on
the night" school of management has to become a threatened
species.
Learning to let go of projects
Other reasons why action on failing projects may not be taken
range from the emotional to the financial. For example, any project
in which sponsors and team members have invested their time will
have an emotional impact at a human level, thus making it difficult
for those closely involved to see what may be blatantly obvious to
a more objective observer - the "cannot see the wood for the trees"
syndrome.
Also, from a financial perspective, where project costs have
hitherto been capitalised with a view towards amortising them over
the useful life of the ensuing system, cancellation is likely to
involve a one-off profit and loss hit of the total costs invested
to date.
This is not always the most popular move with CEOs where market
expectations on corporate earnings may already have been set in
investors' and analysts' minds.
Of course, projects may need to be re-re-evaluated for any
number of reasons, many of which will be outside the direct control
of the business. For example, a new law or regulation may come in
that might invalidate the original proposal, or an unanticipated
move from a competitor may compromise the basis upon which the
original business case was submitted and approved.
It is therefore essential that there is a process for ensuring
that all projects are reviewed regularly for such external changes.
Similarly, internal organisational changes may also upset the basis
of the original business case.
It is common for inadequate performance of the project team,
lack of support from the business, or technical difficulties to
increase costs or extend the project's delivery date to the extent
that the original financial return assumptions may no longer make
sense.
Positive and negative returns
Research by IT consultancy SeaQuation has indicated that a 24%
budget over-run, coupled with a 16% shortfall in delivered
functionality and a two-year delay in implementation, can turn an
expected return on investment of 14% into a negative return of
38%.
It is unlikely that a project with a negative return of 38%
would receive investment approval. Therefore, why should such a
project continue to consume resources that might be better used
elsewhere?
As part of a project for the IT Governance Institute, SeaQuation
carried out an analysis of project cancellations using its database
of current and completed IT projects.
Almost 1,700 projects were selected where sufficient data was
present, representing £4.3bn of investment from 60 different
enterprises. Mandatory and regulatory projects were excluded, as
such projects generally have to be undertaken regardless of whether
or not measurable value will be delivered.
Out of these 1,700 discretionary projects, only 53 ended in
formal decisions to cancel. This represents just 3% of the total
project population - an unexpectedly small percentage given the
anecdotal evidence that exists for non-performing projects - and
the empirical evidence from within the sample population
itself.
The number of cancelled projects is low when compared with the
expected value to be delivered from the total potential portfolio
of almost 1,700 projects.
From the analysis, 31% of the projects either did deliver or
were expected to deliver negative net present values - indicating
value destruction from a significant proportion of the portfolio,
rather than value creation.
Why negative returns?
When analysed by budget, an astonishing 52% of these projects -
representing £1.5bn of investment - would or did deliver negative
returns. This is a fascinating and at the same time disappointing
finding, as it indicates that IT investment portfolios are not
properly or actively reviewed or governed.
If 31% of projects will destroy value, why do only 3% get
cancelled? Even allowing for a margin of error from inadequate or
unreliable data, there would still be an expectation that the
number of projects cancelled would be at least three or four times
higher than it actually is.
What this implies for businesses is that scarce resources
continue to be diverted into IT projects that will destroy rather
than deliver value to the enterprise.
This research supports the findings from a Gartner study from
2004, which indicated that 20% of all IT-related investment
expenditure is wasted.
Projects may be cancelled at any time between their original
inception and the point at which they reach final implementation -
or in some cases shortly after implementation.
Of course, to avoid resource wastage it has to make sense to
cancel an ill-performing or non-value-delivering project as early
as possible in the development phase.
Governance
This emphasises the need for continued vigilance and governance
of the IT investment portfolio in order to identify candidate
projects for cancellation or rationalisation at the optimum
time.
Interestingly, the research from SeaQuation identified that
there was an even distribution of cancellations across the complete
project lifecycle after anything up to 140% of the planned budget
had been spent, proving that projects can and do get cancelled at
any time in the project lifecycle.
However, different types of investment do seem to get cancelled
at different times. For example, according to the research,
transactional investments, meaning those primarily designed to
enhance efficiency, do tend to get cancelled earlier - on average
after 18% of the budget has been spent.
On the other hand, those investments concerned with replacing or
enhancing infrastructure on average get cancelled after more than
55% of the budget has been spent. This is probably because such
projects often involve heavy front-end loading of hardware and
related costs.
So what can be learnt from this analysis? The evidence proves,
with little room for doubt, that there continues to be inadequate
oversight and governance of IT investment portfolios even within
the best run and performing businesses.