The Costs of Failed Projects

There are two ways of estimating the costs of failed projects.

  1. The first, and most frequent method, is to calculate how much has been spent on projects that have failed. This is the then deemed to be the cost of failed projects.
  2. The Second is to analyse the problem that would have been solved if the project had been successful. The cost of failure would then be the value of solving the problem (which has not been achieved) plus the cost of the failed projects.

The first method underestimates the true cost of failed projects, the second is very hard to do. This is because very few business owners actually assess the value of solving their problem. They may have developed a business case which discusses "benefits", but "benefits" lack the specification of value. The unstated consequence of this situation is that most projects are initiated without a clear statement of the value to the organisation of  solving the problem.

Of course, there is the, often invalid,assumption that the problem itself has been properly understood and solved as inputs into the business case.

In support of the first method, above, here is some information on the web. No responsibility is taken for any information on external sites.

This is from Worldwide cost of IT failure (revisited): $3 trillion. written by Michael Krigsman, April 10, 2012:

Nonetheless, the challenge of quantification remains. For this reason, I invited two qualified experts to re-assess the worldwide economic impact of IT failure. Gene Kim was the founder and former CTO of Tripwire, Inc., co-author of The Visible Ops Handbook, and a co-author of an upcoming book called When IT Fails: The Novel ; his colleague, Mike Orzen wrote the book Lean IT and consults on IT operations and business transformation. They are currently co-authoring a new book called The DevOps Cookbook.

The two experts calculated the global impact of IT failure as being $3 trillion annually. They supplied the following text to explain their logic:

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!

(The 20 percent assumption is an extremely conservative number when you consider that when we analyze the value streams of almost all processes across all industries, we discover over 80% of the effort creates no value in terms of benefit to the customer. Mike Orzen's work value stream mapping in many of the largest IT groups around the world consistently shows the same results.)

Here’s another approach at calculating the total waste in IT worldwide: Both IDC and Gartner projected that in 2011, five percent of the worldwide gross domestic product will be spent on IT (hardware, services and telecom). In other words, in 2011, approximately $5.6 trillion was spent on IT.

There are two components to IT spend: capital projects and operations/maintenance. If we assume conservatively that 30 percent of IT spending is for capitalized projects, and that 30 percent of those projects will fail, that’s $252 billion of waste!

But IT is like a free puppy — the lifecycle cost of the puppy is dominated by the “operate/maintain” costs, not the initial acquisition costs. 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!

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!

That’s a staggering amount of value, 4.7 percent of global GDP, or more than the entire economic output of Germany.

Here are some other links, some taken from the same site, others from other places on the web:

Worldwide cost of IT failure: $6.2 trillion Michael Krigsman December 22, 2009
Critique: $6.2 trillion global IT failure stats Michael Krigsman December 29, 2009
A study in project failure by Dr John McManus and Dr Trevor Wood-Harper, from the British Computer Society
The Cost of Bad Project Management by Benoit Hardy-Vallee, 2012
Software Project Failure Costs Billions.. Better Estimation & Planning Can Help by Dan Galorath, June 7, 2008
The Real Costs of Failed Projects By Ilya Bogorad, 11 October 2009

I could go on, but the conclusions I draw from such browsing and analysis are:

The real cost of IT project failures is much greater than you might initially think. Even if you think it is a lot, it is likely to be much more than that.

The root causes of IT project failure are a mystery to those who are involved and to those who observe from afar.

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