Software Project Failure Costs Billions.. Better Estimation & Planning Can Help

Author: · June 7, 2012 · Filed Under Project Management  - 22 Comment(s)

There are so many studies attempting to quantify the cost of software failures.  They don’t agree on percentages but they generally agree that the number is at least  50 to 80 billion dollar range annually.


Standish Chaos Reports
:  Standish is probably the most referenced.  They define success as projects on budget, of cost, and with expected functionality.  There are several updates to the Standish “Chaos” reports. The 2004 report shows:

  • Successful Projects: 29%
  • Canceled projects cost $55 Billion Annually?
  • Challenged Projects: 53%
  • Failed Projects: 18%
Standish Findings By Year Updated for 2009
1994 1996 1998 2000 2002 2004 2009
Succeeded 16% 27% 26% 28% 34% 29% 32%
Failed 31% 40% 28% 23% 15% 18% 24%
Challenged 53% 33% 46% 49% 51% 53% 44%

Most projects cost more than they return, Mercer Consulting: When the true costs are added up, as many as 80% of technology projects actually cost more than they return. It is not done intentionally but the costs are always underestimated and the benefits are always overestimated. Dosani, 2001

Oxford University Regarding IT Project Success (Saur & Cuthbertson, 2003)

  • Successful: 16%
  • Challenged: 74%
  • Abandoned: 10%

British Computer Society:The UK public sector spent an estimated 12.4 bn. on software overall spend on IT about 22.6 Billion British Pounds  (Jaques, 2004)

  • Successful: 16%
  • Failure Costs Tens of Billions of British Pounds in the European Union

National Institute of Standards and Technology (NIST)

  • Software defects cost nearly $60 Billion Annually
  • 80% of development costs involve identifying and correcting defects

Tata Consultancy 2007

62% of organizations experienced IT projects that failed to meet their schedules
49% suffered from budget overruns
47% had higher-than-expected maintenance costs
41% failed to deliver the expected business value and ROI
33% file to perform against expectations

Communications of the ACM Nov 2007: Sauer, Gemino, Reich

Abandoned 9%

Overdeliver 7%

from the paper:

New research into IT failure rates

Phil Sim0n

3 of 5 IT Projects do not do what they were supposed to for the expected costs:

 

49% budget overruns

47% higher than expected maintenance costs

41% fail to deliver expected business value

From Bob Lawhorn presentation  on software failure March 2010

  • Poorly defined applications (miscommunication between business and IT) contribute to a 66% project failure rate, costing U.S. businesses at least $30 billion every year (Forrester Research)
  • 60% – 80% of project failures can be attributed directly to poor requirements gathering, analysis, and management (Meta Group)
  • 50% are rolled back out of production (Gartner)
  • 40% of problems are found by end users (Gartner)
  • 25% – 40% of all spending on projects is wasted as a result of re-work (Carnegie Mellon)
  • Up to 80% of budgets are consumed fixing self-inflicted problems (Dynamic Markets Limited 2007 Study)
===================

 

Dynamic Markets Limited 2007 Study of of 800 IT managers across eight countries shows that:

Two Reasons Why IT Projects Fail Reports:

  • 62 % of organizations experienced IT projects that failed to meet their schedules
  • 49% budget overruns
  • 47% higher-than-expected maintenance costs
  • 41%  failed to deliver expected business value and ROI
  • 25%+ of all software and services projects are canceled before completion
  • up to 80 percent of budgets are consumed fixing self-inflicted problems

” Gartner also reports that “testing consumes 25% to 50% of the average application life cycle and often is viewed as adding no business value.”

11 percent of business organizations consider technology a “strategic weapon,” study by Info-Tech Research Group

——————

From ESSU (European Services Strategy Unit) Research Report No. 3 “Cost overruns, delays and terminations” on IT Projects

Key findings

The Research report identifies 105 outsourced public sector ICT contracts in central government, NHS, local authorities, public bodies and agencies with significant cost overruns, delays and terminations. The summary of findings are (from Tables 1 and 2):
105 outsourced public sector ICT projects with significant cost overruns, delays and terminations.

  • Total value of contracts is  29.5 billion
  • Cost overruns totaled 9.0 billion
  • 57% of contracts experienced cost overruns
  • The average percentage cost overrun is 30.5%
  • 33% of contracts suffered major delays
  • 30% of contracts were terminated
  • 12.5% of Strategic Service Delivery Partnerships have failed

Table 1: ICT contract summary

Central government, NHS public bodies and agencies (Million Pounds) Total: 28,058 Overruns & Write-offs 8,876
Local Government Total: 1,446 Overruns & Write-offs 18
Total
29,504
8,994European Services Strategy Unit, 2007.

Table 2:

Summary of cost overruns, delays and terminations

 

Contracts with cost overruns 60 57%
% Average cost overrun per contract -30.5%
Contracts with delays- 35 33%
Contracts terminated 31  30%
SSP contracts terminated or substantially reduced 4 12.5 (% of SSDP contracts)

European Services Strategy Unit, 2007.

RAND STUDY COST OVERRUNS ON SPACE SYSTEMS Average SYSTEM Growth 46%: “An analysis of the data contained in Selected Acquisition Reports (SARs) reported from the late 1960s to 2004 shows that the average total cost growth factor for completed Major Defense Acquisition Programs (MDAPs) was 46 percent. This percentage was calculated by comparing the actual final acquisition costs of a program to its cost estimates presented in the SAR published at the program’s Milestone B decision (MS B)1 when the program was approved for system development and demonstration.” Note these overruns are for the entire system, not just the software.  Summary here.

Computer World 10 Worst US Commercial Project Failures of the ’90s

Computerworld published a list of the top 10 corporate information technology failures

This list of failures includes hundreds of millions of dollars of losses to organizations including not jus the cost of the software, infrastructure and services but losses to the business as well.  For example, according to the article a failed reservations system caused Greyhound to loos their status as a transport powerhouse and cause a $61 million loss for the first half of 1994

Hersheys: lost over $150 million due to a SAP / Seibol deployment

Oxford Health Care: Nearly $400 million in overstated revenues

.

Firoz Dosani, vice president of Mercer Consulting claims “When the true costs are added up, as many as:

  • 80% of technology projects actually cost more than they return. It is not done intentionally but the costs are always underestimated and the benefits are always overestimated.” (Dosani, 2001).

————————–

Roger Seasons BLOG, September, 2009 lists the costs of IT project failures based on several reasonable assumptions:

Cost of IT Failure

we are already losing over USD 500 billion
per month on IT failure, and the problem is getting worse. http://www.objectwatch.com/whitepapers/ITComplexityWhitePaper.pdf
According to the World Technology and Services Alliance, countries spend, on average
  • 6.4% of the Gross Domestic Product (GDP) on Information Communications Technology
  • 43% of this spent on hardware, software, and services.
This means that, on average, 6.4 X .43 = 2.75 % of GDP is spent on hardware, software, and services. I will lump hardware, software, and services together under the banner of IT.

According to the 2009 U.S. Budget, 66% of all Federal IT dollars are invested in projects that are at risk. I assume this number is representative of the rest of the world.

A large number of these will eventually fail. I assume the failure rate of anat risk project is between 50% and 80%. For this analysis, I’ll take the average: 65%.

Every project failure incurs both direct costs (the cost of the IT investment itself) and indirect costs (the lost opportunity costs). I assume that the ratio of indirect to direct costs is between 5:1 and 10:1. For this analysis, Ill take the average: 7.5:1.

To find the predicted cost of annual IT failure, we then multiply these numbers together: .0275 (fraction of GDP on IT) X .66 (fraction of IT at risk) X .65 (failure rate of at risk) X 7.5 (indirect costs) = .089. To predict the cost of IT failure on any country, multiply its GDP by .089.

Based on this, the following gives the annual cost of IT failure on various regions of the world in billions of USD:

REGION GDP (B USD)                             Cost of IT Failure (B USD}

World:               69,800                                6,180

USA:                   13,840                                 1,225

New Zealand:   44                                          3.90

UK:                       2,260                                    200

Texas:                 1,250                                     110

———————-

The IT Complexity Crisis: Danger and Opportunity by Roger Sessions Nov 2009:

—————————-

68% of IT Projects Fail: primary cause identified as poor requirements by Michael Krigsman referring to a study by IAG

Key findings from the report, The Impact of Business Requirements on the Success of Technology Projects from IAG Consulting, include (emphasis added):

  1. Companies with poor business analysis capability will have three times as many project failures as successes.
  2. 68% of companies are more likely to have a marginal project or outright failure than a success due to the way they approach business analysis. In fact, 50% of this groups projects were runaway which had any 2 of: taking over 180% of target time to deliver; consuming in excess of 160% of estimated budget; or delivering under 70% of the target required functionality.
  3. Companies pay a premium of as much as 60% on time and budget when they use poor requirements practices on their projects.
  4. Over 41% of the IT development budget for software, staff and external professional services will be consumed by poor requirements at the average company using average analysts versus the optimal organization.
  5. The vast majority of projects surveyed did not utilize sufficient business analysis skill to consistently bring projects in on time and budget. The level of competency required is higher than that employed within projects for 70% of the companies surveyed.

====================

An older paper encompassing failures, primarily in Canada follows:

“Considering that an estimated $25 billion is spent each year on IT application development in this country [Canada], the KPMG findings paint an alarming picture of projects mismanagement in both private and government sectors.” (Newswire, 1997).In the area of project management, the project teams ranked number two in contributing to project failures when the failure was mainly due to schedule and cost overruns.

When the failure was mainly due to budget overruns, the project manager was a significant factor. The lack of the necessary skills and/or expertise ranked second in the major factors that contributed to failed projects (KPMG, 1997).

The turnover of essential personnel who were part of the project team, such as the project manager, was identified as one of the major problems.

The study performed by KPMG stated that 38% of the respondents identified the change in essential personnel as a risk, and they ranked this factor as number four.

A team may fail due to the low skill level of the team members. For example, the Federal Aviation Administration had a software development team working on a system to replace the antiquated air traffic control system. The system, the Advanced Automation System, had numerous bugs after over ten years of development. The software was too unreliable to trust for life and death situations; it was also six years late (Joch, 1995). This project failed in part due to unskilled and under-skilled team members.

Uncommitted team members also are a reason for failed IT teams. Silicon Graphics released a software application with over 500 serious bugs. Morale within the team was very low and the bug count high. The task of meeting the projected schedule, which was nine months away, was impossible. Management responded by hiring two contractors who were strangers to company’s software and the organization. The result was disastrous (Joch, 1995). This team also failed due to the inappropriate allocation of team members. Management and the IT industry still have not learned the lesson that more bodies at the end of a project do not equate to a condensed schedule to meet an already unrealistic deadline. It only complicates matters.

Lack of knowledge and skill of the project team member seems to continue to be a recurring problem with the software development projects. The Foundation of Research in Information Technology (FRIT) is studying obstacles to the Revenue Departments Bt 1.8 billion IT project, the largest in the country of Thailand. “Due to numerous problems, IBM (Thailand), which was overseeing the implementation of the computer system, asked to terminate the project and Cabinet agreed” (Sutharoj, 1998). As part of the plan to prevent such future disasters, the foundation is helping the Computer Association of Thailand set standards for local programmers and analysts. This plan includes raising the quality of local IT personnel to international standard. This is another example of unskilled team members and not having a structured method for software development.

The project size usually has a direct relationship to the team size. Sixty percent of the small projects failed, where a small project is a project that was scheduled for completion within 12 months. Almost all of the respondents reported these 60% of failed small projects went over schedule (KPMG).

===============================

The Bull Survey, UK(1998)In 1998, the French computer manufacturer and systems integrator, BULL, requested an independent research company, Spikes Cavell to conduct a survey in the UK to identify the major causes of IT project failure in the finance sector.

Scope of the Survey

A total of 203 telephone interviews were conducted with IT and project managers from the finance, utilities, manufacturing, business services, telecoms and IT services sectors in UK. All the managers interviewed had previously taken the lead in integrating large systems within organizations in the Times Top 100.

Project Evaluation Criteria

The main IT project failure criteria identified by the IT and project managers were:

missed deadlines (75%)
exceeded budget (55%)
poor communications (40%)
inability to meet project requirements (37%).

The main success criteria identified were:

meeting milestones (51%)
maintaining the required quality levels (32%)
meeting the budget (31%)

Key Findings

The survey reveals that the major causes of project failure during the lifecycle of the project are a breakdown in communications (57%), a lack of planning (39%) and poor quality control (35%). The Bull Survey (1998)

In 1998, the French computer manufacturer and systems integrator, BULL, requested an independent research company, Spikes Cavell to conduct a survey in the UK to identify the major causes of IT project failure in the finance sector.

Scope of the Survey

A total of 203 telephone interviews were conducted with IT and project managers from the finance, utilities, manufacturing, business services, telecoms and IT services sectors in UK. All the managers interviewed had previously taken the lead in integrating large systems within organizations in the Times Top 100.

Project Evaluation Criteria

The main IT project failure criteria identified by the IT and project managers were:

missed deadlines (75%)
exceeded budget (55%)
poor communications (40%)
inability to meet project requirements (37%).

The main success criteria identified were:

meeting milestones (51%)
maintaining the required quality levels (32%)
meeting the budget (31%)

Key Findings

The survey reveals that the major causes of project failure during the lifecycle of the project are a breakdown in communications (57%), a lack of planning (39%) and poor quality control (35%).

========================================

North American Computer Audit, Control & Security

Association (2008)

More than 40% of responding government agencies recently killed an

IT project prior to implementation

Medicaid System Failures

Cancelled MMIS projects

Major cost overruns

Multi-year schedule slippage

Inability to perform key functions correctly

Throw-away systems that need to be replaced when proprietary

technology becomes obsolescent

Expensive to maintain and operate

More information in Software Failures Cost Billions Part 2

Obviously software estimation is essential to more successful projects… I wonder how many projects would not be started if strong software estimation techniques were employed?  And what the true cost is to organizations of challenged projects. Sometimes, a slip with the project being successfully delivered is a minor sin.  Other times a slip can be devastating to the organization.  What are your experiences or opinions in this regard.

Thank you for reading “Dan on Estimating”, if you would like more information about Galorath’s estimation models, please visit our contact page, call us at +1 310 414-3222 or click a button below to ask sales questions, sign up for our free library or schedule a demo.

Comments