By Cory Emmett 

In projects of every nature, including large-scale information systems rollouts, ineffective project management routinely leads to cost overruns.  The inability to effect meaningful change in the midst of a major project can have ramifications far beyond the budget and scope, which can lead to disruption of business or impacts greater than a failed project.  Although projects are managed with a widely accepted framework, change management is often overlooked and poorly managed. 

Consider the example of a major Line of Business (LOB) application migration undertaken by the Levi Strauss company.  They attempted to move from a fragmented business management system to a centralized, integrated application using the software known as SAP.  The total cost of the project was estimated at close to $5 million.  Although the framework and planning for the project had been managed effectively, increasing demands by retailers that required system access, coupled with a lack of data analysis during the core of the project, caused a major overrun.  In this particular scenario, the project manager’s lack of change management expertise created a project cost that ballooned to over $193 million.  In addition, three major US distribution facilities were forced to halt production, which resulted in a loss of more than $200 million.  All told, almost $400 million in expenditures were incurred because of the ineffective change management during a routine LOB application expansion.

Project Management: The Raw Data

Although the $5 million project budget is far greater than the cost of projects typically undertaken by companies in the small business sector, the risk of a failing project is not.  A recent study undertaken by researchers at Cornell examined more than 1,471 projects; the study showed several alarming incongruities: the average cost overrun for a major IT systems project was more than 27 percent.  However, the most shocking realization was that over one in six IT projects have a cost overrun of more than 200%.  That is to say, one out of every six projects undertaken in the IT realm will exceed its budget by twofold.

The data now shows that without effective change management, the average project will exceed its budget by more than a quarter; additionally, if your project is in the sixteen percent that will triple its original cost, the impact to your business will be far greater. The Levi Strauss example no longer appears as far-fetched, and the question is no longer if one of your projects will fail, it’s when; this is further compounded by the realized penetration of information systems in modern businesses. 

Beyond the budgetary excesses, the nature of business in the information age can compound the issues to an even greater extent.  The reach of a modern company’s data systems extends into every appendage: management, accounting, manufacturing, procurement, resale – every system is interconnected by its nature.  As such, issues associated with even a slight pre-existing vulnerability can be dangerously amplified by a botched project; Levi Strauss’ failure to account for the impact of an SAP upgrade on its wholesalers is an example.

Accounting for Overruns in the Early Stages

Prior to engaging in projects of any scale or nature, it’s imperative that a business fully realizes the cost of a failed undertaking.  The authors of the aforementioned study suggest some measures to avoid the “Black Swans”, or the 16% of IT projects that cost three times their original budget.  Most importantly, readiness ‘stress tests’ can determine if a project’s scope is large enough to cause the collapse of the organization, given the average cost overrun conditions.  This would include an analysis to determine if the company is strong enough to absorb the hit if its biggest project is over budget by 400%, with only a quarter to one-half of its benefits fully realized.  A second test would determine if the organization can continue if its medium sized projects exceed their budget by 200% or more.  

These simple tests can provide a framework for determining budgetary risk associated with a project portfolio.  However, the real value in planning stems from effective project change management.  Even with the best planning prior to a project kickoff, the project can encounter difficulties along the way that could disrupt the entirety of the endeavor; hence the need for change management.  Once you’re sure that your business can survive given the reality of a failed project, steps can be taken to avoid the “black swans” altogether.

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