The Four Horseman of IT Project Doom: Identify Early Warning Signs to Avoid Failure

Republished with permission

TASA ID: 1302

William Shedd, a noted American Presbyterian Theologian in the 1800s, once said, “A ship is safe in harbor, but that’s not what ships are for.” Almost 150 years later, modern businesses are finding the principles behind this saying still hold true. In fact, this same line of thinking can effectively be applied to many information technology (IT) projects today.

IT investments comprise over half the capital budgets of U.S. organizations, but in spite of the obvious importance placed on IT, many projects are cancelled outright, completed late, over budget, or fail to deliver the promised business capabilities and financial ROI. Given the magnitude of the resources utilized, the opportunity costs, and the risks involved, IT projects are clearly an issue that deserves executive-level attention in addition to that afforded it by the chief information officer at your company. 

The planning and management of IT project investments is a material concern for those dealing with requirements of the Sarbanes-Oxley Act of 2002 (SOX), the Statement on Auditing Standards No. 70: Service Organizations (SAS 70), financial forecasts, SEC reports, and other regulatory and reporting requirements. Such concerns are not limited to U.S. companies and their foreign subsidiaries since these laws and standards potentially affect companies outside the U.S. as well.

The management of risk underpins the insurance industry, but it is the mastery of  risk that distinguishes modern times from the past. IT project management, despite the fact that it deals with “modern” technologies, is embarrassingly immature in the mastery of risks. Today, about 20 percent of IT projects are cancelled before completion, nearly half have cost or time overruns or fail to fully meet requirements, and only about a third are finished on-time, within budget, and with expected functionality. If the discussion is limited to larger and therefore riskier projects, the total failure or cancellation rate approaches 50 percent. Obviously, more effective risk management is needed to avoid troubled IT projects and make desirable risk taking possible. 

IT spending is materially significant in the insurance industry, especially given its low margin nature. Deloitte estimates insurance company margins to be only about 5 percent. Estimates indicate IT spending accounts for about 4 percent of insurance company annual revenues, or nearly 30 percent of operating expenses, notwithstanding annual, sector, and individual company variations. About 40 percent of that IT spending, or about 1.6 percent of insurance revenues, is investments in projects aimed at cutting costs, meeting regulatory requirements, improving customer services, delivering new products, improving security, and reducing fraud. 

It is estimated that in 2010 global GDP will approach $65 trillion USD and insurance premiums will reach nearly $5 trillion, or about 7.7 percent of global GDP. Using premiums as a surrogate for revenues, IT spending by insurance companies in 2010 may reach $200 billion and total IT project budgets should be in the $80 billion range (even higher by some estimates).

IT projects are often material and yet the nature and magnitude of their risks unnoticed. However, signs of trouble come in many shapes and sizes, including restatements of financial reports, bankruptcies, failure to deliver new or promised products, or products produced quickly that do not meet current customer needs. As noted previously, the insurance industry is certainly not exempt from such problems. The industry has had its fair share of troubled IT project too, often with dire consequences, including situations like these:

• Ongoing computer problems caused denial of coverage, overcharges, and cancellation of benefits so regulators banned a large health insurer from selling certain policies.
• Improperly tested software caused a privacy breach of the personal information of several hundred thousand insurance company customers.
• The stock of an insurer dropped 60% due to billing system failures reportedly resulting in receivables write offs of more than $100,000,000 and multi-million dollar fines levied by government agencies.

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