Why do the costs increase? – 15% cost increase through project failure
by jed simms on June 30, 2010
Consistently research has found that around 15% of projects fail, vaporize, get cancelled, never finish or otherwise deliver nothing for the time, effort and costs involved, destroying value and reducing the overall net return on your total project investment portfolio.
This overall cost of failure represents a cost impost or capital loss ‘tax’ on all projects.
Now, you always want to cancel non-feasible, wayward or irrelevant projects – so you don’t want your project write-off figure to be zero otherwise you condemn all projects to completion regardless of whether they are worthwhile. But, you don’t want your failure rate to be 15% either.
To reduce this figure you need to catch poor projects as early as possible to minimise the value ‘written off’ and to offset this value by delivering as much progressive value as possible in every project prior to any cancellation. (Another benefit of progressive benefits realization.)
Paradoxically, the best project delivery organizations cancel the most projects – as they are innovating, trying out ideas but recognising when events have changed and the project is no longer viable. But they cancel them early and quickly. They do not pour good money after bad.
Project cancellation is not “failure”. Continuing a project to completion when it cannot deliver the planned business outcomes, benefits and value is real “failure”. This simple redefinition of failure often requires quite a mental shift in many organizations where currently “to cancel a project” is seen as a personal failure. Instead, sanctions should be in place for those who continue to fund projects that have no hope of success.
Cancelling projects early keeps the total written off cost down while increasing the overall value delivered by your portfolio by focusing the bulk of the portfolio investment funds on worthwhile projects.
The Value Delivery Management™ GOVERNANCE PROGRAM focuses the governance team on assessing their project’s viability and relevance each quarter.
2 comments
Project success or failure is undoubtedly one of the lest well understood of all project metrics – the old adage “the operation was a success but the patient died comes to mind”.
To my mind, to avoid this “project failure” mentality, and to be be truly innovative, an organization should allocate a percentage of it’s annual project portfolio to “at risk” projects – that is to explore opportunities where the commercial viability is uncertain at the outset, but where there is an expectation that there could be a a positive outcome.
Organizations can then determine how much they are prepared to put at risk while an initial feasibility is explored prior – perhaps development of a prototype, or just to scope out a concept and see if there is a business case to support the concept.
To support this approach, governance in the initiation of projects, and a well defined “gating process” is required to ensure that the correct review processes are in place so to ensure that projects which do not have a return, or are not appropriate for the organization are not allowed to proceed once the outcome is understood.
by Kevin Hanvey on June 30, 2010 at 3:04 pm. #
Kevin is right in his recommendation that some money be allocated to high risk, speculative projects – pushing the boundaries.
What is important is that these projects are managed as high risk and of an uncertain future and don’t become part of the furniture.
The most successful companies fail, fail often, BUT fail quickly. If the project isn’t going to cut it, then it is culled, now!
As my article said, you never want the failed project number to be zero; but you do want it to be managed.
by Jed Simms on July 1, 2010 at 12:08 pm. #