Imaginist35’s Weblog

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The cost of a failed project is not just what you spent on the project

Are you expecting your next business transformation project to deliver the full planned benefits, on time and within budget?

Really? So what are you going to do differently this time? Or were you just keeping your fingers crossed and hoping for a miracle? You can’t afford to invest in a transformation programme that does not deliver the results you need – look at the cost implications:

Typical change project

You need to achieve efficiency savings of £200k pa by bringing in a new web-based system.

The software licence and web costs will be £40k and it will cost £150k to implement (including allocation of in-house project management and training resources).  The plan is to roll out the system across the organisation over 18 months

So your 3-year business case looks like this:

Year 1 Year 2 Year 3 Total /3
Licence, web costs pa £40,000 £40,000 £40,000 £0
Implementation costs £100,000 £50,000 £0 £0
Total Costs £140,000 £90,000 £40,000 £90,000
Savings £50,000 £175,000 £200,000 £142,000
Net £-90,000 £85,000 £160,000 £52,000

Return on investment is +57%, and you hit your full efficiency savings target levels by mid-year 2.
But what happens if the project slips by 6 months?
The 3-year ROI drops to just +2% and it takes over 2 years to reach your efficiency target – but you are also 33% over budget and your implementation resources are tied up on this project, so something else isn’t being done in time either.

What if the project fails completely?
What happens if you cancel the project after 2 years, because it is clear that it will never bring in the full benefits? You have wasted £280,000 and over £400,000 in lost efficiency savings, but that’s not all – you probably have had to take action to limit the impact of the failed project, which may cost you several times what the project cost.

HP’s project managers knew all of the things that could go wrong with their ERP centralisation programme in 2004. But they just didn’t plan for so many of them to happen at once. The project eventually cost HP $160 million in order backlogs and lost revenue — more than five times the project’s estimated cost.

So if you could avoid the second scenario, it would be worth £100,000 and if you could avoid the last scenario, you’d be at least £680,000 in pocket.

What do these figures look like for your project?

If you are interested, we do have some answers…

April 12, 2010 - Posted by | business change management, project and programme management | , , , , , , ,

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