Why do so many business change initiatives fail to deliver on their promises and how can you succeed where so many have failed? By Stephen Jenner FCMA, senior civil servant with the UK Ministry of Justice.
The reason organisations invest in business change initiatives, including those that are IT-enabled, is to realise benefits. These benefits can be increased revenue; productivity improvements and cost savings; or a contribution to a strategic priority. Or we may do it because we have to – in response to a legal or regulatory requirement or to maintain business as usual. But how do we ensure these benefits are realised in practice?
The text book approach is to complete a business case, select projects and programmes on the basis of greatest net presetn value (or more correctly, NPV per unit of limiting factor), subject to their exceeding the organisation’s hurdle rate of return. Then to manage costs to budget and hold people accountable for the realisation of the forecast benefits.
Sounds good. But there’s only one problem with this approach. Too often, it doesn’t work.
Mott McDonald undertook a research study for the UK Treasury in 2002 of large public sector procurement projects. The study found that costs were generally underestimated and benefits overestimated. HM Treasury concluded: 'There is a demonstrated, systemic tendency for project appraisers to be overly optimistic.'
An 'acceptable level of failure'
This tendency afflicts the private as well as the public sector. For example, KPMG reported in its 2005 global IT survey that, 'Project success appears to equate to achieving an acceptable level of failure or minimising lost benefits.'
Lovallo and the Nobel-prize winning Daniel Kahneman in their 2003 Harvard Business Review article noted that: 'Most large capital investments come in late and over budget, never living up to expectations. More than 70% of new manufacturing plants in North America, for example, close within their first decade of operation. Approximately three-quarters of mergers and acquisitions never pay-off…And efforts to enter new markets fare no better.'
Flyvbjerg and others undertook the largest ever study of project success and failure – focusing primarily on transport infrastructure investments, but they also validated their findings against a range of other types of project. They conclude: 'Very high statistical significance that forecasters generally do a poor job of estimating [with estimates that were] highly, systematically, and significantly misleading (inflated). The result is large benefit shortfalls.'
Optimism bias
What’s the cause? The 'optimism bias' identified above is due to a combination of two factors.
- Firstly, cognitive biases - that is, we suffer from biases in the way we make forecasts. Even while recognising that such biases exist, we assume that they affect others but not ourselves. This is known as the planning fallacy or as Lovallo and Kahneman call it 'The tendency to hold a confident belief that one’s own project will proceed as planned, even while knowing that the vast majority of similar projects have run late'. A study for the World Bank, for example, concluded that planners are affected by what they term the ‘EGAP’ principle, that is, the assumption that ‘Everything goes according to plan’. It doesn’t. The result is that those charged with developing business cases suffer from what Lovallo and Kahneman refer to as delusional optimism: 'They overestimate benefits and underestimate costs. They spin scenarios of success while overlooking the potential for mistakes and miscalculations.'
- Secondly, what Flyvbjerg and others refer to as, 'strategic misrepresentation', that is, 'the planned, systematic, deliberate misstatement of costs and benefits to get projects approved...In short, that is lying.' This is because 'Lying pays off, or at least economic agents believe it does.' Sharpe and Keelin concur: 'Figures don’t lie, but liars can figure.' Ward reports that 38% of respondents in one survey openly admitted to overstating benefits to get funding with the traditional investment appraisal process being, 'seen as a ritual that must be overcome before any project can begin.'
Active benefits realisation management
What this all means is that the benefits forecast in our business cases are unlikely to be realised and the cost estimates are likely to be understated. This in turn compromises our investment appraisal and portfolio prioritisation processes. If we cannot rely upon cost and benefit estimates how can we reliably prioritise investments or determine whether it’s worth investing in the first place?
The answer is active benefits realisation management. As part of this we need to realise that:
- ensuring the benefits forecast in our business cases are robust and realisable. Are we really clear about exactly what benefits will be delivered and has sufficient provision been made for all the changes upon which benefits realisation will depend?
- going beyond the organisation’s hurdle rate of return to capture all forms of value. If we don’t there is a real risk that potential value will just drift away. The money we’re investing is taxpayers’ or shareholders’ - the task at hand is not to meet some minimum rate of return but to maximise return.
- tracking benefits to ensure ‘the performance matches the promise’, and going beyond passive tracking to an active search for value based on: continuous engagement with users; a hunger for learning; and managing benefits from a portfolio or enterprise perspective.
Is realising benefits a fool’s errand? The answer in the final analysis is yes – not in the usual sense but rather, as with the fool at the monarch’s court in Medieval England, someone with the independence and objectivity to challenge the ‘assumptions that masquerade as facts’ in our business cases.
Steve Jenner will examine the three challenges identified above in the next three articles in this series.
He will also be presenting a CIMA Mastercourse on ‘Active benefits realisation management’ in July and November 2010.
Jenner is the author of ‘Realising benefits from government ICT – a fool’s errand?'