To top managers at Levi Strauss, revamping the information technology system seemed like a good idea. The company had come a long way since its founding in the 19th century by a German-born dry-goods salesman: In 2003 it was a global corporation, with operations in more than 110 countries. But its IT network was antiquated, a balkanized mix of incompatible country-specific computer systems. So executives decided to migrate to a single SAP system and hired a team of Deloitte consultants to lead the effort. The risks seemed small: The proposed budget was less than $5 million. But very quickly all hell broke loose. One major customer, Walmart, required that the system interface with its supply chain management system, creating additional hurdles. Insufficient procedures for financial reporting and internal controls nearly forced Levi Strauss to restate quarterly and annual results. During the switchover, it was unable to fill orders and had to close its three U.S. distribution centers for a week. In the second quarter of 2008, the company took a $192.5 million charge against earnings to compensate for the botched project—and its chief information officer, David Bergen, was forced to resign.
A $5 million project that leads to an almost $200 million loss is a classic “black swan.” The term was coined by our colleague Nassim Nicholas Taleb to describe high-impact events that are rare and unpredictable but in retrospect seem not so improbable. Indeed, what happened at Levi Strauss occurs all too often, and on a much larger scale. IT projects are now so big, and they touch so many aspects of an organization, that they pose a singular new risk. Mismanaged IT projects routinely cost the jobs of top managers, as happened to EADS CEO Noël Forgeard. They have sunk whole corporations. Even cities and nations are in peril. Months of relentless IT problems at Hong Kong’s airport, including glitches in the flight information display system and the database for tracking cargo shipments, reportedly cost the economy $600 million in lost business in 1998 and 1999. The CEOs of companies undertaking significant IT projects should be acutely aware of the risks. It will be no surprise if a large, established company fails in the coming years because of an out-of-control IT project. In fact, the data suggest that one or more will.
We reached this bleak conclusion after conducting the largest global study ever of IT change initiatives. We examined 1,471 projects, comparing their budgets and estimated performance benefits with the actual costs and results. They ran the gamut from enterprise resource planning to management information and customer relationship management systems. Most, like the Levi Strauss project, incurred high expenses—the average cost was $167 million, the largest $33 billion—and many were expected to take several years. Our sample drew heavily on public agencies (92%) and U.S.-based projects (83%), but we found little difference between them and projects at the government agencies, private companies, and European organizations that made up the rest of our sample.
The True IT Pitfall
When we broke down the projects’ cost overruns, what we found surprised us. The average overrun was 27%—but that figure masks a far more alarming one. Graphing the projects’ budget overruns reveals a “fat tail”—a large number of gigantic overages. Fully one in six of the projects we studied was a black swan, with a cost overrun of 200%, on average, and a schedule overrun of almost 70%. This highlights the true pitfall of IT change initiatives: It’s not that they’re particularly prone to high cost overruns on average, as management consultants and academic studies have previously suggested. It’s that an unusually large proportion of them incur massive overages—that is, there are a disproportionate number of black swans. By focusing on averages instead of the more damaging outliers, most managers and consultants have been missing the real problem.
Success Story: How One Company Nailed a Tricky IT Project
In April 2006 Emirates Bank decided to revamp parts of its core banking system. After 12 months of planning, managers kicked off the project. They had two main objectives: to avoid mission creep and to go live as soon as possible. During the summer of 2007, however, the bank announced a merger with the National Bank of Dubai, forming Emirates NBD. This immediately made the already-complex project much more daunting: The system now needed to work for both banks—and it had to be ready in 18 months. In addition, it was to be rolled out in a “big bang”: All the components—branch computers, ATMs, online banking, and call centers—would be switched to the new system simultaneously. The potential for going way over budget was all too real.
But by the time the project was completed, in November 2009, the schedule had slipped by only 7%, and costs had exceeded the initial estimate by only 18%—even though the merger had doubled the project’s s