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

June 7, 2008 · Filed Under Project Management  - 6 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:

  • Failed Projects: 18%
  • Challenged Projects:  53%
  • Successful Projects: 29%
  • Canceled projects cost $55 Billion Annually?

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

 

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

Two Reasons Why IT Projects Fail Reports:

  • 62 %o 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

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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 $150million due to a SAP / Seibol deployment

Oxford Health Care: Nearly $400 million in overstated revenues

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 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).

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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 an “at 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, I’ll 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

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

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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 group’s projects were “runaways” 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.

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.


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Comments

6 Responses to “Software Project Failure Costs Billions.. Better Estimation & Planning Can Help”

  1. Bryn on June 10th, 2008 5:52 pm

    I’ve worked two large software development programs that were both cancelled after years of development, and one that has survived despite 100% cost and schedule growth. The difference has been the degree of interaction with the user, and the continued need for and understanding of the capability. In no case was the program funded anywhere near the independent cost estimate, but rather at what was perceived to be affordable.

  2. why software projects fails - looking inside « Osama Dwairi Blog on October 28th, 2008 2:25 am

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  3. PwC: follow the money | AccMan on May 26th, 2009 4:54 am

    [...] This was in the context of Satyam. It goes on but you’ll need to click through to read the whole bloody mess. What is surprising about this is that it doesn’t seem to cross legislators minds that the obvious conflicts of interest exist. Time and again governments continue to re-appoint the same firms when time after time we see project failure. [...]

  4. Web Based Project Management on September 15th, 2009 4:54 am

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  5. The Open World Assumption: Elephant in the Room » AI3:::Adaptive Information on December 21st, 2009 8:20 pm

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