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Just How Much Do Failed IT Projects Cost?

by Shane Hastie on May 26, 2013 |

in  2009 the worldwide cost of failed IT projects was estimated to be as high as Six Trillion USD, using calculations by Roger Seasons

Michael Krigsman was critical of these results and persuaded Gene Kim and Mike Orzen to relook at the numbers and make an estimate of the impact of IT failure on the global economy.

The statistics for project outcomes depend on whose results you read - the Standish Group conducts their Chaos Survey every two years and they show project failures to be around one quarter of the projects in their sample.  The BCS published a study showing 23% of the projects they examined were cancelled.  

In their calculations Kim and Orzen take a conservative 20% failure figure, and provide the following start for their calculations:

For just the Standard & Poor 500 companies, aggregate 2012 revenue is estimated to be $10 trillion. If 5 percent of aggregate revenue is spent on IT, and conservatively, 20 percent of that spending creates no value for the end customer - that is $100 billion of waste!

They continue to examine where IT money is spent and say

If we conservatively estimate that 50 percent of global IT spend is on "operate/maintain" activities, and that at least 35 percent of that work is urgent, unplanned work or rework, that's $980 billion worldwide of waste!

They conclude with a call to better management and less waste:

What reward can we expect through better management, operational excellence and governance of IT? If we halve the amount of waste, and instead convert it into 5x of value, that would be (50 percent * $1.2 trillion waste * 5x). That's $3 trillion of potential value that we're letting slip through our fingers!

The analysis can be found here.

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Not a very coherent article Shane by Ethar Alali

There isn't a link to the actual research nor analysis from Kim and Orzen. Additionally, the samples from the above numbers don't add up 'inter-box'. I had to go digging for the research, which I will get round to reading together with the various critiques.

However, there is always a lot of 'over-defensive' backlash by IT when the words 'IT project failures' are uttered. Dare I say, this is especially true in the agile community, since we have nobody to blame but ourselves, given that we have spent a lot of time and carried a lot of risk trying to get companies to 'trust us'. Unfortunately, in my experience, the technical critics, especially from solely an agile background, often don't understand enough about business value, accounting nor optimisation to create an adequate critique of the effect of lost projects. Especially in corporate finance and economic terms.

One of the things they routinely forget for example, is that when people are on a project that is failing, those staff are also NOT on a project that is succeeding and delivering value (and income). For companies with only one or two core products or services, this is a catastrophe. You are paying staff to deliver next to no business value and also not making income at the other end to stem that loss. This is not just the loss of an opportunity cost (assuming the business value is not specified adequately at the beginning ;-) it also has a very real component if/when funds are diverted from the successful projects to shore up or pay for the failing projects (fixed costs such as ongoing staff salaries, capital costs, rental space for the team, overheads etc.). This is an example of what is meant by a 'cash flow' problem :-)

I hope to find time to read the critique and return to this.

Re: Not a very coherent article Shane by Shane Hastie

Hi Ethar

Thanks for the critical look at the news item.

I realised after reading your comment that I'd left two very important links out of the piece - the link to who Michael is and the link to the published analysis. They are both now in the item above.

Thanks again

Shane

Re: Not a very coherent article Shane by Shane Hastie

PS: I agree with your points about business value, which will be topic for some additional news items and articles in the future.

Thanks

Shane

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