How to ensure optimium value from IT investments

Driving value from IT projects requires watching for danger signs and a willingness to let go of a project if it will not deliver return on investment

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.




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