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How to kill a Black Swan

By Marilyn de Villiers
Johannesburg, 17 Nov 2017

It is a dangerous fallacy that because so many IT projects run over-time and over-budget, they are not a big deal. Not only could they result in reduced benefits and/or a lower return on investment that made the project so attractive to start with, they could actually threaten the very existence of a company.

Research conducted by McKinsey in collaboration with Oxford University indicated that half of all large IT projects massively exceed their budgets. On average, large IT projects run 45% over budget and 7% over time, while delivering 56% percent less value than predicted.

In its report on the research, Delivering large-scale IT projects on time, on budget, and on value, McKinsey put the total cost of these over-runs at higher than the GDP of many small first-world, and most third-world countries.

The researchers also found that the longer a project was scheduled to last, the more likely it was to run over time and budget, with every additional year spent on the project increasing cost overruns by 15%. Software projects apparently run the highest risk of cost and schedule overruns.

Estimate to complete

While most companies survive the pain of cost and schedule overruns, McKinsey reported that 17% percent of IT projects become what is popularly referred to as "Black Swans". These are projects that go so pear-shaped, they threaten the very existence of the company.

Guy Jelley, CEO of Johannesburg-based Project Portfolio Office (PPO) said one of the main reasons for the over-time/over-budget phenomenon was that many project managers underestimated the importance of an "estimate to complete". Yet this estimate was key to project cost management.

According to Jelley, many project managers had difficulty answering a simple question about how much the project would cost in the end. They often inaccurately used the variance cost - the project budget minus the actual cost - as their estimate, but this was seldom the amount that would be needed to complete the project.

"Every project manager must be able to effectively control and manage their costs," he said, and added that tools such as the PPO Project Manager Dashboard could assist with this.

Value assurance

However, even before getting into the nitty-gritty of a specific project, McKinsey maintained that the high rate of Black Swan failure made it essential to analyse prospects before starting a large IT project.

This required the organisation to determine the status of their key projects and programs including those already finalised as well as existing projects (to understand company-specific problems) and planned projects (to estimate their true cost and duration).

Thereafter the key to a project's success lay in the way the entire project was approached: how much attention was paid to four elements of what could be termed a "value assurance" methodology.

These elements included:

  1. Focusing on managing strategy and stakeholders instead of exclusively concentrating on budget and scheduling.
  2. Mastering technology and project content by securing critical internal and external talent.
  3. Building effective teams by aligning their incentives with the overall goals of projects.
  4. Excelling at core project-management practices, such as short delivery cycles and rigorous quality checks

The McKinsey report noted that an inability to master the first two dimensions typically caused about half of all cost overruns, while poor performance on the second two dimensions accounted for an additional 40% of overspending.

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