In 2003, the top managers of Levi Strauss decided to replace the IT system. At that time, the company was a multinational structure with operations in 110 countries. The risks seemed to be small: The proposed budget was less than $5 million. But very quickly all hell broke loose. One major customer, Walmart, required that the system interface with its supply chain management system, created additional hurdles. Insufficient procedures for financial reporting and internal controls nearly forced Levi Strauss to restate quarterly and annual results. During the switchover, it was unable to fill orders and had to close its three U.S. distribution centers for a week. In the second quarter of 2008, the company took a $192.5 million charge against earnings to compensate for the botched project. $5 million project that leads to an almost $200 million loss is a classic “black swan.”
The term “Black Swan” was coined by Nicholas Nassim Taleb to describe high-impact events that are rare and unpredictable but in retrospect seem not so improbable. Indeed, what happened at Levi Strauss occurs all too often, and on a much larger scale. IT projects are now so big, and they touch so many aspects of an organization, that they pose a singular new risk. Mismanaged IT projects routinely cost the jobs of top managers. They have sunk whole corporations. Even cities and nations are in peril. The CEOs of companies undertaking significant IT projects should be acutely aware of the risks. It will be no surprise if a large, established company fails in the coming years because of an out-of-control IT project. In fact, the data suggest that one or more will. (Why Your IT Project May Be Riskier Than You Think by Bent Flyvbjerg and Alexander Budzier, Harvard Business Review, September 2011 Issue.)
Looking to a lower level, in the IT realm, especially in the software zone, projects fail. Even good projects fail in time due to poor maintenance or impossible sustainability.
According to ZDNet, the following facts are present nowadays:
- Companies with poor business analysis capability will have three times as many project failures as successes.
- Sixty-eight percent of the 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 percent of this group’s projects were “runaways” which had any 2 of: taking over 180 percent of target time to deliver; consuming in excess of 160 percent of estimated budget; or delivering under 70 percent of the target required functionality.
- Companies pay a premium of as much as 60 percent on time and budget when they use poor requirements practices on their projects.
- Over 41 percent 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.
- 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 percent of the companies surveyed.
Moreover, the trends is that more and more IT projects fail; no matter their budgetary dimensions or complexity. From the budgetary point of view, in 2011, University of Oxford conducted the largest global study ever (at the time) of IT initiatives.
Their experts examined 1,471 projects, comparing their budgets and estimated performance benefits with the actual costs and results. Most incurred high expenses (the average cost was $167 million, the largest $33 billion) and many were expected to take several years.
The findings were surprising: the average overrun was 27%. Fully one in six of the projects they studied were “black swan”, with a cost overrun of 200%, on average, and a schedule overrun of almost 70%. This highlights the true pitfall of digital initiatives: It’s not that they’re particularly prone to high cost overruns on average, as management consultants and academic studies have previously suggested. It’s that an unusually large proportion of them incur massive overages; there are a disproportionate number of “black swans.” It is no doubt that by focusing on averages instead of the more damaging outliers, most managers and consultants have missed the real problem.
Based on a large number of projects our experts performed, AXIOBIT has developed some outlines for approaching digital projects. They are:
- Consider every digital project an innovation initiative;
- Apply the innovation processing methodology such as design thinking;
- Design the business processes, rules and decisions that affect the projects and decide the development;
- Use agile PM to build the prototype;
- Build high-fidelity prototypes;
- Test it with real users and persona.
- Make all the required and rational corrections and get approvals;
- Decide on the opportunity (even no start is a valuable decision)
- Development & implementation stage;
- Use waterfall PM methodology for the development stage.
Applying these principles, there is a set of benefits:
- You will be able to test the future before it will happen; that it is a great achievement;
- A minimal impact of Black Swan (the improbable events connection)
- Minimum 30% cost savings for implementation.
- Rational PM approach;
Some thoughts about Black Swan:
Black Swan logic makes what you don’t know far more relevant than what you do know. Consider that many Black Swans can be caused and exacerbated by their being unexpected. A black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterized by their extreme rarity, their severe impact, and the practice of explaining widespread failure to predict them as simple folly in hindsight.
- A black swan is described as a rare event with severe consequences. It cannot be predicted beforehand, though many claim it should be predictable after the fact.
- Black swan events can cause catastrophic damage to an economy, and because they cannot be predicted, can only be prepared for by building robust systems.
- Reliance on standard forecasting tools can both fail to predict and potentially increase vulnerability to black swans by propagating risk and offering false security.
Of Lebanese – or, as he preferred, of Levantine – descended but working in New York, Nicholas Nassim Taleb was an option trader and quantitative analyst. Mistrusting the “bell-curve” models used by many financial institutions to mitigate risk, firstly, he wrote a book called Fooled by Randomness about the delusions of control and reliability under which labor much of Wall Street, many other businesses – and, indeed, individual human beings. Then it was The Black Swan!
And here it is the black swan and its effects!