Annual cost of IT failure: $6.2 trillion

The total annual cost of worldwide IT failures is $6.2 trillion dollars, according to calculations performed by Roger Sessions, über-expert enterprise architect and CTO of ObjectWatch.

Roger presents his analysis in a blog post:

According to the World Technology and Services Alliance, countries spend, on average, 6.4% of the Gross Domestic Product (GDP) on Information Communications Technology, with 43% of this spent on hardware, software, and services. This means that, on average, 6.4 X .43 = 2.75 % of GDP is spent on hardware, software, and services. I will lump hardware, software, and services together under the banner of IT.

According to the 2009 U.S. Budget, 66% of all Federal IT dollars are invested in projects that are “at risk”. I assume this number is representative of the rest of the world.

A large number of these will eventually fail. I assume the failure rate of an “at risk” project is between 50% and 80%. For this analysis, I’ll take the average: 65%.

Every project failure incurs both direct costs (the cost of the IT investment itself) and indirect costs (the lost “opportunity” costs). I assume that the ratio of indirect to direct costs is between 5:1 and 10:1. For this analysis, I’ll take the average: 7.5:1.

To find the predicted cost of annual IT failure, we then multiply these numbers together: .0275 (fraction of GDP on IT) X .66 (fraction of IT at risk) X .65 (failure rate of at risk) X 7.5 (indirect costs) = .089. To predict the cost of IT failure on any country, multiply its GDP by .089.

Based on this, the following gives the annual cost of IT failure on various regions of the world in billions of USD:

REGION        GDP (B USD)  Cost of IT Failure (B USD)
World         69,800       6,180
USA           13,840       1,225
New Zealand   44           3.90
UK            2,260        200
Texas         1,250        110

THE PROJECT FAILURES ANALYSIS

Quantifying the cost of failure is an exceedingly important step in communicating the scope and breadth of this worldwide problem. Roger Sessions deserves our thanks for doing so.

The calculations are highly dependent on the underlying assumptions. Some of the key variables include:

• Definition of "failure"
• Rates of failure
• Global variation in rates across country

Although Roger's calculations are not precise, they paint a clear, directional picture suggesting the financial impact of IT failures.

Please share your thoughts on how these calculations can be refined.

[[Image from iStockphoto.]