As IT systems become an important competitive element in many industries, technology projects are getting larger, touching more parts of the organization, and posing a risk to the company if something goes wrong. Unfortunately, things often do go wrong. Our research, conducted in collaboration with the University of Oxford, suggests that half of all large IT projects—defined as those with initial price tags exceeding $15 million—massively blow their budgets. On average, large IT projects run 45 percent over budget and 7 percent over time, while delivering 56 percent less value than predicted. Software projects run the highest risk of cost and schedule overruns.¹ (See Exhibit 1, at left.)
These findings—consistent across industries—emerged from research recently conducted on more than 5,400 IT projects.² by McKinsey and the BT Centre for Major Programme Management at the University of Oxford. After comparing budgets, schedules, and predicted performance benefits with the actual costs and results, we found that these IT projects, in total, had a cost overrun of $66 billion, more than the GDP of Luxembourg. We also found that the longer a project is scheduled to last, the more likely it is that it will run over time and budget, with every additional year spent on the project increasing cost overruns by 15 percent.
Staggering as these findings are, most companies survive the pain of cost and schedule overruns. However, 17 percent of IT projects go so bad that they can threaten the very existence of the company. These unpredictable high-impact events—“black swans” in popular risk parlance—occur significantly more often than would be expected under a normal distribution. Large IT projects that turn into black swans are defined as those with budget overruns of more than 200 percent (and up to 400 percent at the extreme end of the spectrum). Such overruns match or surpass those experienced by black swans among complex construction projects such as tunnels and bridges. One large retailer started a $1.4 billion effort to modernize its IT systems, but the project was eventually abandoned. As the company fell behind its competitors, it initiated another project—a new system for supply-chain management—to the tune of $600 million. When that effort failed, too, the retailer had to file for bankruptcy.
Four ways to improve project performance
So how do companies maximize the chances that their IT projects deliver the expected value on time and within budget? Our surveys of IT executives indicate that the key to success lies in mastering four broad dimensions, which combined make up a methodology for large-scale IT projects that we call “value assurance.” The following elements make up this approach:
- focusing on managing strategy and stakeholders instead of exclusively concentrating on budget and scheduling
- mastering technology and project content by securing critical internal and external talent
- building effective teams by aligning their incentives with the overall goals of projects
- excelling at core project-management practices, such as short delivery cycles and rigorous quality checks
According to survey responses, an inability to master the first two dimensions typically causes about half of all cost overruns, while poor performance on the second two dimensions accounts for an additional 40 percent of overspending. (See Exhibit 2, at left.)
1. Managing strategy and stakeholders
IT initiatives too often pay little heed to strategy and stakeholders and manage projects purely according to budget and schedule targets. The perils are illustrated by one bank’s transformation effort, in which its finance department became involved only a few months before the system was due to go live. This led to several complex changes in the accounting modules as a result of a recently introduced performance-management system. Coming so late in the day, the changes delayed the launch by more than three months, at a cost of more than $8 million.
Top-performing projects, on the other hand, establish a clear view of the initiative’s strategic value—one that goes beyond the technical content. By building a robust business case and maintaining focus on business objectives along the whole project timeline, successful teams can avoid cost overruns. They can also, for example, ensure faster customer response times, obtain higher-quality data for the marketing organization, or reduce the number of required manual processes.
High-performing project teams also improve the ways in which a company manages its internal and external stakeholders, such as business and IT executives, vendors, partners, and regulators. They make sure the project aligns with the company’s overarching business strategy and undertake detailed analyses of stakeholder positions. Project leaders continually engage with all business unit and functional heads to ensure genuine alignment between business needs and the IT solutions being developed.
Good stakeholder management involves foresight when it comes to selecting vendors and negotiating contracts with them. Company negotiators should proactively identify potential risks and, for instance, expand their focus beyond unit price and seek to establish “win–win” agreements. Doing so can help ensure that the company has preferential access to the vendor’s best talent for an extended period of time.
Some companies have learned this the hard way. A bank in the Middle East negotiated hard for price with a vendor and later suffered at the hands of an inexperienced vendor team. Another bank scored well on unit price with a software-package provider for the project phase of a trading-system implementation but encountered high costs for changes and support after the system was introduced and the bank was locked into the new technology.