IT Project Overages: Where to Look for Answers?

Over the last couple days, I’ve been taking a look at the annual costs of IT projects, how much value is retained after they’re complete, and how much money is wasted. Today I wanted to spend a bit of time looking at the ratios between the two, and try to understand what’s happening.

All of the charts on this page are based on the exact same data sets I’ve used in the last two blog posts. Mouse over any part of any chart to see the underlying data.

If a project is successful, more or less, the dollars spent on the project are representative of the value of the new product or service. That’s a pretty optimistic view, as even the best run projects usually have some waste. But for purposes of this discussion I’m going to keep things simple.

Failed and cancelled projects, on the other hand, retain very little value, as the new product or service was never created. There may be some residual value found during the course of the project while it was running, but for the most part, the money spent went straight out the window.

In addition, indirect costs of failed projects are very high. That means, all of the revenue, transferred assets, additional business or opportunities that the project was expected to realize, never happened.

For this article, I’m not going to talk about indirect costs, because they’re highly variable and are not necessarily related to direct project costs.

Looking at the direct costs, however, we can see two discrete data sets. There’s the money consumed to provide equivalent value: this means, that for every dollar spent, the project realized one dollar of value. Then there’s the money burned: this means, that for every dollar spent, the project realized squat. Bupkiss. Nada. This money was completely wasted.

Consumption vs. Burn

We often hear “the IT burn rate” quoted in journals. The implication of this is that IT blows through x amount of money, and there’s some discretionary threshold above which is unacceptable and below which is manageable.

Formation of sodium chloride:
Mats retained, energy consumed

I hear this, and then I think back to my high school chemistry. Sodium and chlorine combine to create salt. Before the reaction, I have one sodium ion, and one chlorine ion, kind of lonely in their separate corners. When I put them together, there’s a massive outpouring of energy, and the two unstable ions become one stable molecule. Now here’s the thing. I’ve retained my materials–I still have all of my sodium and chlorine ions. My cost to make the molecule was the energy I had to expend to get them to combine. But because I still have all of my original materials, I’ve wasted nothing, and now I have something new. In other words, I got what I paid for.

When looking at physical things, it’s easy to see whether we got value for our cost or not. If an apple costs $1.00, then we realize $1.00 of value for the apple when we buy it. Projects, on the other hand, spend most of their money on effort, rather than physical goods. Effort is intangible. You only see value for your money after the effort is complete.

For this article, let’s set some definitions:

1) Consumption: Money consumed creates value. The expense fed into a piece of work equals the value realized from that work.
2) Burn: Money burned creates nothing. The expense fed into a piece of work results in no value whatsoever. A synonym for “burn” would be “waste”.

With that in mind, take a look at the following chart.

Category % of Value Retained % of Cash Burned
Successful Projects 100% 0%
Challenged Projects 46% 54%
Failed Projects 0% 100%

 

Based on the foregoing, I see a few things:

1) The lion’s share of money spent lies with challenged projects. These are projects that were successfully completed, but had problems: the budgets or schedules were overrun, or the functionality delivered was less than the functionality expected. Management was likely disappointed or surprised, and money may have been spent addressing that.

2) The funds consumed to create value are very close to the funds wasted. This implies a 2:1 ratio of money spent to value retained.

3) Money spent on successful projects is not much different from money spent on failed or cancelled projects. Indirect costs of failed projects notwithstanding, the two almost cancel each other out.

Successful and failed projects don’t provide us a lot of insight, as the data only shows us binary states: either all of the money was consumed to create value, or all of the money was burned (not very helpful). That leaves us with challenged projects.

According to the data, slightly more than half the money spent on challenged projects was spent on effort that didn’t contribute towards the end product. There are multiple causes for this type of waste, but in a project setting, the biggest danger is always rework.

Feng Consultants recently identified several causes of rework in California Hospital design. They are as follows:

Planning, Programming and Budgeting Rework Causes Design Planning and Scheduling
Rework Causes
Design Review Rework Causes
  • Lack of owner commitment (substantial)
  • Lack of owner flexibility
  • Lack of owner knowledge
  • Owner changes
  • Changes in business case
  • Change in user groups
  • Escalation costs
  • Inappropriate design process (substantial)
  • Inappropriate review process
  • Poor document control
  • Scope changes
  • Design changes
  • Errors and omissions
  • Improper equipment selection
  • Inappropriate design process
  • Inappropriate batch size
  • Inappropriate review process (substantial)
  • Code changes
Other Causes of Rework
  • Leadership and communication
  • Material and equipment supply

 

I like this list because it gives us a place to attack the overages we see in the data above. We need that when we go into a project, so we know what to keep an eye on when we build our plans.

As an interesting side note, Hal Macomber and Gregory Howell described the “Two Great Wastes” of human capital in 2004:

1) Not listening, the first great waste
2) Not speaking, the second great waste

Looking at the rework causes in the above table, it makes me wonder. All of this project waste…billions and billions of dollars…the energy to fight and argue over who was at fault…the unhappy feelings that result from waste and the indirect costs of waste. Does it really all boil down to these two things?

I think it does.

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I’m a professor of project management at the college where I work. My students continually amaze me with their insights, passion and all-around awesomeness. I figure they deserve access to more answers than I can give them by myself. This site is for them.
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