About sponsorship
Project management
Overdue and over budget, over and over again
Jun 9th 2005
From The Economist print edition
Mary Evans
Companies are increasingly keen on projects. Why, when so many
fail?
WHEN George Stephenson built a railway from Liverpool to Manchester in
the 1820s, it cost 45% more than budget and was subject to several
delays as it made its way across the treacherous Chat Moss bog. In the
intervening 180 years the management of large-scale projects seems to
have improved but little. At the end of May the reconstruction of Wembley
Stadium, the hallowed home of English soccer, was threatened when
Multiplex, the Australian developer of the site, admitted that it faced
mounting losses on the £750m ($1.4 billion) project. An unanticipated rise
in the cost of steel (which doubled in 2004) and the extra labour required
to ensure the building is ready for next May's FA Cup Final were said to
have thrown the management's calculations out of kilter.
Even projects deemed a success these days sometimes fail to meet their
targets. The 1,770km (1,106 miles) oil pipeline from Azerbaijan's Caspian
wells to the Turkish Mediterranean port of Ceyhan was opened with much
fanfare on May 25th by the presidents of the three countries under whose
soil it lies (Azerbaijan, Georgia and Turkey). But the $4 billion project, led
by BP (see article), is several months overdue and 5-10% over budget.
Although oil has entered the pipeline at Baku, it will be another six months
before the high-grade steel pipe is full and ready to disgorge on to tankers
in the Mediterranean.
Big projects today are as likely to be built on software as they are on steel.
But IT projects are no better at meeting budgets and deadlines. A £6
billion project to put the medical records of 50m Britons online by the end
of this year is way over budget and has already been postponed by several
of this year is way over budget and has already been postponed by several
months. In March, the FBI finally abandoned a $170m internal IT project,
two years after problems with it had first surfaced. The Standish Group, a
research firm which produces an influential annual evaluation of IT
projects, judged that in 2004 only 29% of such projects “succeeded”, down
from 34% in 2002. Cost over-runs averaged 56% of original budgets, and
projects on average took 84% more time than originally scheduled.
It is not as if project management is a new science. It has its origins in
critical paths and Gantt charts, planning tools first widely used in the early
20th century, and its own well-established international association, the
Project Management Institute (PMI), based in Newtown Square,
Pennsylvania. The PMI sets standards and professional exams that are
taken by thousands every year. It boasts 150,000 members in 150
countries, all of them specialists in managing projects. So why do so many
still go so wrong?
Projects, says the PMI, have five distinct phases: initiation; planning;
execution; control; and closure. Problems arise most frequently when
initiation gets separated from execution. To secure a project, bidders often
make overly optimistic assumptions about costs and revenues—an example
of what Max Bazerman of the Harvard Business School calls “self-serving
bias”, a phenomenon he uses to explain why good accountants do bad
audits. It may also explain why good project managers make bad
forecasts, particularly in the public sector, where after-the-event
accountability to a project's paymaster, the taxpayer, is less rigorous. This
may be pronounced with prestige projects (such as Wembley Stadium)
where bidders are chasing glory almost as much as commercial gain.
A study published this year in the Journal of the American Planning
Association examined 210 big rail and road projects in 14 different
countries, and found their forecasts of future passengers to be wildly
optimistic: for the rail projects, they were, on average, an astounding
106% higher than eventually turned out to be the case, with one in eight
out by over 400%; the road projects' miscalculations were more modest,
by over 20% in more than half the cases. The article's authors, led by Bent
Flyvbjerg, a professor at Denmark's Aalborg University, claim that the
forecasts on such projects are no more accurate now than they were 30
years ago.
Projecting forwards
Greg Balestrero, the head of PMI, says that for years project management
was largely ignored. But that is now changing. A recent PMI survey found
that three out of four European companies employ project managers. When
Compaq, a computer maker, was taken over by Hewlett-Packard in 2002, it
had some 1,400 on its payroll.
Three years ago the board of Siemens launched a worldwide initiative to
improve its project management. The German electronics group had
worked out that half its turnover came from project-like work, and it
calculated that if it could complete all of these projects on time and to
budget, it would add €3 billion ($3.7 billion) to its bottom line over three
years. A key element of the scheme was the introduction of project
managers to the company's sales teams to try and temper their more
extravagant promises, a move that requires a careful balance between
reining them in and killing the deal.
Some companies have gone so far as to become more like project
co-ordinators than producers of goods or services. The “business-as-usual”
bits of their operations have been outsourced, leaving them free to design
and orchestrate new ideas. Nike, for instance, does not make shoes any
more; it manages footwear projects. Coca-Cola, which hands most of the
bottling and marketing of its drinks to others, is little more than a
collection of projects, run by people it calls “orchestrators”. Germany's
BMW treats each new car “platform”, which is the basis of new vehicle
ranges, as a separate project. Meanwhile Capital One, a fast-growing
American financial-services group, has a special team to handle its M&A
“projects”. For all these firms, project management has become an
“projects”. For all these firms, project management has become an
important competitive tool. Some of them call it a core competence.
Good project management can certainly make a difference. BP's fortunes
were transformed when it converted its exploration division, BPX, into a
portfolio of projects, each of them more or less free from head-office
control—a structure which the company describes as an “asset federation”.
Asset/project managers can no longer rely on head office for support. They
are required to build their own self-sufficient teams.
Moreover, there are still difficult individual projects that get completed with
time and money to spare. The winner of last year's PMI Project of the Year
award was the Saudi-Aramco Haradh gas pipeline, whose original
contracting document was lauded for the way it “defined the mix of
contracts best suited to accomplish the project's objectives”. The
three-year project to build a $2 billion gas terminal deep in the desert,
10km from the nearest road, was completed six months ahead of schedule
and 27% under budget. Phew, what a scorcher.
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