'Black Swan' IT Projects With Out-of-Control Budgets Can Kill Enterprises

Project managers aren't properly assessing low-probability, high-impact risks when planning budgets and timelines for IT projects.

Major IT projects are 20 times more likely to fail than other business projects, according to a recent study from Oxford University.

IT projects on average are 27 percent over budget and take 55 percent longer to complete than originally planned, researchers from the University of Oxford's Said Business School's BT Centre for Major Program Management said Aug. 22. Researchers analyzed 1,471 global projects where the organization had revamped its information technology systems within the last 10 years. The projects were worth a total of $245 billion, and on average cost $170 million.

After comparing their budgets and estimated performance benefits with actual costs and results, researchers found that project managers were not taking into account unpredictable events when planning IT projects. Instead, they focused on the average performance of previous projects. When the projects spiraled out of control, both the careers of the managers and the future of the organization were at risk, the researchers found.

"IT projects are now so big and touch so many aspects of business, government and citizens' lives that this poses a singular new challenge for top managers," said Prof. Brent Flyvbjerg, principal investigator and BT professor and founding chair of Major Program Management. Companies may be hit by an out-of-control project when they are already facing difficulties and can't afford the increased costs.

While projects on average overran expectations by 27 percent, some projects encountered rare and huge events that should have been identified at the start. Researchers called these projects "black swan" IT projects and said the issues generally came toward the end of the projects to catch project managers by surprise. Black swan projects are impossible to predict and on average go 197 percent over budget and take 68 percent more time than expected, according to the study.

"Any company contemplating large technology projects should ask whether the company is strong enough to absorb the hit should it go over budget by 400 percent. Although this figure may seem excessive, as our research shows, costs such as these can occur all too frequently," said Flyvbjerg.

While there are no indicators that some industry sectors are more prone to black swans than others, researchers found some project types are more likely to spiral out of control. For example, the risk of cost overruns in hardware infrastructure projects is low while the risk in software projects is high.

The study drew heavily on public agencies and U.S.-based projects, but there was little difference between them and the projects at private companies and European organizations in the study, researchers said.

"People always thought that the public sector was doing worse in IT than private companies-our findings suggest they're just as bad," Flyvbjerg told BBC.

Organizations should keep the project's scope in mind and make every decision in the project based on business benefits. Only 20 percent of the surveyed projects analyzed the business benefits before making decisions.

"Rotten-egg IT projects have brought down well-known brands such as Kmart and the U.K.'s second largest car glass company, Autowindscreens," said the researchers. The companies collapsed while trying to implement large IT projects, and others, including Airbus, Levi-Strauss, TollCollect and Hershey's, have been "on the brink of collapse" because of problems with IT projects, the Oxford researchers found. Flyvbjerg said he would not be surprised if another "large, established company" fails in coming years for the same reason.

The researchers said companies need to take more notice of low-probability, but high-impact risks, and to consider whether they have the expertise for the project. Managers also need to consider software compatibility and other existing or predicted economic factors that might affect their company's ability to handle delays in the project and increased costs.