Eventually, Perhaps, Your New IT System Will Be Able to Figure Out Just How Big a Hole You’ve Blown in Your IT Budget

Posted on Oct 24, 2012 | 5 Comments

If you’re feeling guilty about hugely blowing your budget on a technology project, at least you’re not alone.

Writing in the latest McKinsey QuarterlyMichael BlochSven Blumberg and Jürgen Laartz report that massive troubles on large IT projects—defined as those with initial price tags exceeding $15 million— are alarmingly common. On average, the analysis finds, these initiatives run 45% over budget and 7% over time, while delivering 56% less value than predicted.

The research in question was based on an examination of 5,400 IT projects.  In total, the cost overruns for all of these came to $66 billion—or, as the authors note, “more than the GDP of Luxembourg.”

Cleaning up these messes, the authors note, should start with four principles, all of which were also articulated by Peter Drucker, whose insights we append here:

1. “Focusing on managing strategy and stakeholders instead of exclusively concentrating on budget and scheduling.”

Only if targets are defined can resources be allocated to attain them,” Drucker wrote in Management: Tasks, Responsibilities, Practices. “Only then can priorities and deadlines be set, and somebody held accountable for results.”

2. “Mastering technology and project content by securing critical internal and external talent.”

“It is precisely the purpose of a plan,” Drucker wrote, “to show where scarce resources—and the scarcest is good people—should be working.”

3. “Building effective teams by aligning their incentives with the overall goals of projects.”

Each manager, from the ‘big boss’ down to the operations supervisor, needs clearly spelled-out objectives. Otherwise confusion can be guaranteed,” Drucker warned. “These objectives should always derive from the goals of the business enterprise.”

4. “Excelling at core project-management practices, such as short delivery cycles and rigorous quality checks.”

These were practices for which Drucker felt that traditional Japanese firms, at their best, set the standard. In Managing in a Time of Great Change, Drucker laid out their core strengths as follows: “control of the economics of the entire production and distribution process rather than accounting control of the costs of each step; zero-defects quality; and shortening development, production and delivery cycles by spending money to save time.”

What do you think causes so many IT projects to blow their budgets and deadlines—and what can fix the problem?

5 Comments

  1. Sergio
    October 25, 2012

    Not practicing the four principles above, is definitely a good start towards ensuring late and over budget IT projects.

    Some additional causes are explained below.

    At the interpersonal level, the stereotypical rift between business and IT contributes to this problem and gets worse when project pressures increase. In my experience the problem is particularly present when a business analyst lacks a real understanding of the economics of IT (i.e. across people/process/tech), or when IT lacks a true and genuine customer focus.

    When the business analyst lacks an appreciation for the complexities of IT, the result is poorly specified or ambiguous requirements (e.g. confusing ‘what’ with ‘how’) and many headaches trying to resolve the confusion with IT in wasteful meetings. Never mind this situation prevents IT and business from trusting and respecting one another.

    However, when the problem is IT’s lack of genuine customer focus, the result is an inefficient/ineffective implementation of the requirements which is no laughing matter!</a

    To fix these interpersonal issues, the bottom line is that IT and the business need to trust and respect one another.

    At the engineering level, implementing large IT projects requires effectively managing complexity. The skill and competence of the IT experts becomes key here, particularly their ability to align business value and IT (as suggested in the McKinsey article above). This process is generally referred to as Enterprise Architecture and it is the job of the enterprise architect to manage the technical complexity (i.e. managing levels of coupling and cohesion within the architecture).

    To fix the engineering problems with large IT projects, you need a highly competent enterprise architect along with the supporting people and processes to ensure an effective enterprise architecture .

    Finally, at the process level, Peter Drucker nails it with principle #4 above. In the IT world this is the famous debate between the Waterfall vs. Agile. The Waterfall methodology is predictive and attempts to define the full scope of the project during the project's initial phases before implementation begins, despite the fact that the longer the project goes, the greater the probability that the customer's needs have changed. Agile methodologies on the other hand are adaptive, they recognize the complexities in IT and rely on continuous feedback and improvement to drive towards delivering business value.

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  2. Ivor
    October 25, 2012

    Calling these projects IT projects is a good way to ensure they fail. IT projects are seen as ‘special cases’ rather than ‘business cases’. I also think McKinseys estimates are conservative – I don’t think any large IT projects have ever been a success.

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  3. Maverick18
    October 27, 2012

    Any IT professional knows that if he/she ever tells the prospective project buyer or sponser how many source lines of code (SLOC) will really have to be written and how long the job is really going to take, the job will never be authorized. More simply, budgets and deadlines are blown because they are overly optimistic from the outset. It’s not the implementation, it’s the up front lyin’ that is the culprit.

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  4. What Peter Drucker Would Be Reading | The Drucker Exchange | Daily Blog by The Drucker Institute
    October 30, 2012

    [...]     Dx Comment of the Week: Last week, when we asked what might be causing so many IT projects (according to a McKinsey report) to blow their budgets [...]

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