Worldwide cost of IT failure: $6.2 trillion

Worldwide cost of IT failure: $6.2 trillion

Summary: Most IT professionals know that project failure is a common and serious problem in organizations of all kinds. New research attempts to quantify the extent of IT failure in the worldwide economy.

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TOPICS: CXO
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Update 12/29/09: Take a look at this critique of the research described in this post:

Most IT professionals know that project failure is a common and serious problem in organizations of all kinds. New research attempts to quantify the extent of IT failure in the worldwide economy.

Most IT failure research seeks to determine the percentage of projects that run over-budget, are late, or do not deliver expected results. While those numbers are important, they do not convey a concrete sense of the overall cost impact created by failed IT.

To address this issue, Roger Sessions, a noted author and expert on complexity, developed a model for calculating the total global cost of IT failure. Roger describes his approach in a white paper titled, The IT Complexity Crisis: Danger and Opportunity. He concludes that IT failure costs the global economy a staggering $6.2 trillion per year.

Calculations. To determine the overall cost impact of failure, Roger's white paper goes through a series of assumptions and calculations. Here is an abridged version -- see the white paper itself for more detail:

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. The other 57% is spent on communications technology. 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 [02], 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 use the average: 65%.

The cost of a failed project is only the tip of the iceberg. Every project failure incurs both direct costs (the cost of the IT investment itself) and indirect costs (the lost opportunity costs).

When thinking about indirect costs, you need to include the costs of replacing the failed system, the disruption costs to your business, the lost revenue because of the failed system, the lost opportunity costs on what that lost revenue could have driven, the costs to your customers, lost market share, and on and on. And you need to consider these costs over the number of years the system would have been functional had it not failed (or at least the number of years until you can put another system in place.)

You can see that indirect costs add up quickly. I will 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 projects) X 7.5 (indirect costs) = .089. To predict the cost of IT failure on any country, multiply its GDP by .089.

The following table performs this calculation of various regions of the world:

THE PROJECT FAILURES ANALYSIS

The white paper suggests that worldwide IT failure costs $500 billion per month, a truly astonishing figure. But is this number accurate or useful?

The cost numbers are a SWAG (sophisticated wild-ass guess) illustrating orders of magnitude for the global IT failures problem. Although not precise, the numbers demonstrate the seriousness of IT failure around the world.

Roger acknowledges this in the white paper:

The numbers are estimates, of course. The precise numbers are not the point. The sheer magnitude of the numbers is what is important. As IT professionals we have a responsibility to understand how we can prevent the continuing spiral of failures that is burying us.

The calculations include estimates for lost opportunity costs incurred when projects fail, which is one reason these numbers are so high. These indirect costs have significant impact on the calculations reported in the white paper. Various observers have debated the validity of including indirect costs in the model, although that issue is not yet settled.

It would be valuable for someone to apply Roger's calculations to determining the cost of IT failure inside a specific corporation or government agency. If you are interested in pursuing that problem, please contact me on Twitter.

My take. Roger's calculations are a useful measure for demonstrating the extent of IT failures as a problem. Combining these numbers with independent estimates that 68% of IT projects fail yields a compelling and frightening story of IT failure as we approach the start of a new decade.

Update 12/28/09: I'm thrilled this discussion has jumped over to Slashdot. Welcome Slashdot readers!

Topic: CXO

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104 comments
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  • RE: Worldwide cost of IT failure: $6.2 trillion

    It's always interesting to see "evidence" for the Trillion Dollar Bonfire but the unexpected cost and disappointment from investing in IT should not be a surprise to anyone.

    Recognizing the problem is not the issue, effective solutions are required - and available to those willing to break free from the redundant IT paradigm.

    Colin Beveridge
    colinbeveridge
  • RE: Worldwide cost of IT failure: $6.2 trillion

    looks like an extrapolation o a study carried out by the Standish Group in the 1990'and I have a feeling that the causes of the GAFUs of the 90' are still valid today....
    gna@...
    • deja vu

      I recall this BS number being bantered around earlier this year.

      The World's GDP or GWP is $60.6T. I doubt that IT spending public and private is $6.2T over 10% let alone the failures. That is 50% of the GDP of the US alone.

      I call nonsense on these numbers. The only failure I see is the article.
      someitguy79
      • Ah, yes ...

        The ostrich solution.
        Cardhu
  • "precise numbers are not the point" ?

    This is great. Somebody just made up a bunch of numbers. Now others can use these made-up numbers as reference and extrapolate further.
    In no way it is believable that "failure of IT" can cost almost 10% of GDP. There is also no clear definition of "failure" and why suddenly "projects at risk" become failures? This way one could count all people going across the street as killed by cars since all these people are at risk when crossing the street.
    This estimation is just a 6.2 trillion nonsense.
    paul2011
    • World wide losses, not just the US.

      Re-read the article.
      No_Ax_to_Grind
      • Yes, re-read the article

        World GDP 69,800.00 Failure 6,180.48 -- 8.8%
        US GDP 13,840.00 Failure 1,225.47 -- 8.8%

        Now how it is possible to spend 6.4% of GDP on ICT and have losses that amount for 8.8%.
        What are gains then? And what is failure? Did you know that 80% of all statistics are made up and the rest 70% contains errors? :)
        paul2011
        • gain, you MUST account for lost opportunity.

          Yes I know, its not easily done and most hate doing it because there is a deffinate "blue sky" factor to it. But the bottom line is if your IT staff is off chasing a failed project instead of adding real value to the bottom line, its a loss.

          As I said further down, cut the number in half, its still mind numbing.
          No_Ax_to_Grind
        • statistics are made up

          8 out of 9.211 of all statisticians disagree with this premise 91.666% of the time. 2/3 of the rest haven't thought about it.
          The remaining 3% just don't know!
          Agnostic_OS
        • Estimation is an extremely useful skill in science and engineering

          Enrico Fermi was a Nobel Prize-winning experimental physicist who was a famous estimator:

          http://www.education.com/activity/article/Fermi_middle/

          http://physics.suite101.com/article.cfm/fermi_problems_physics_estimation

          This article is about an order of magnitude estimation. The assumptions made in the estimate are documented in the article. The process is a well-recognized and accepted practice in science and engineering.

          So read through the article and state exactly which estimates in the analysis you disagree with and why.

          I disagree with "indirect losses" being estimated at 7.5 times that of "direct losses." IT organizations don't invest in large scale IT projects only expecting a 2x or even 10x return. They expect much larger returns.

          For example, a company spending $50M on a project that fails and costs $100M to replan, redesign, and replace in 1 year with $2B in lost revenue and market share will actually lose $2.1B - that's a loss of 42 times the initial investment, or 4200%. Those are reasonable figures for big business.

          So if anything, the estimate of IT losses at only 10% of a country's GDP comes out sounding quite low.

          Work up your own estimates paralleling those of the article, state them, and see how the numbers play out.
          Cardhu
    • I agree - Yet another ZD report of nothing

      From my read of the report, it sounds totally inane. The author just picked numbers out of thin air.

      Why did ZD bother to report this report exists. Is anyone actually using this data? I hope not. If this kind of reporting continues, I'm going to stop subscribing to ZD. There's too much real tech news out there to bother reporting that this dribble exists.
      FlyingsCool
      • It's "drivel" not "dribble."

        The assumptions in the article are, if anything, lower than what is actually real.

        http://talkback.zdnet.com/5208-13604-0.html?forumID=1&threadID=73115&messageID=1416373
        Cardhu
  • Software turd polisher says:

    The facts are grim. I am a software turd polisher. I fix broken projects and I don't think I have ever seen a project that was not broken in the past twenty years. Every project I worked on before becoming a turd polisher was not a success. I went forth and used my knowledge of what not to do and what to change and managed to get about 200 million dollars of failed project off the ground in ten different companies.

    Companies do not have a clue about software development or a clue about either the risks of new software development and not a one of them is smart enough to find a solution for their problems even from vendors who have pre-packed solutions for them. Bad fits in over all software systems make sure that the numbers of failures, cited above here, are true.

    Very few people have the big picture in the IT sector. Any IT project that is using a mix of junior developers needs at least two to three senior developers watching their asses every single day. Only senior developers should be doing business critical software. The rest are in training and are quite dangerous to the health of software projects. Most junior developers can be trained to manage the software the senior developers are building but they cannot now, or ever, until they have at least 20 years experience ever build complex software without adult supervision.

    But the exact opposite situation is out there making sure your estimates are on the low side and not over stated at all.
    progon
    • I've been there too!!

      And boy, do I know what you're talking about.

      I have a commentary on this topic here:

      http://philcardhu.vox.com/
      Cardhu
    • The good news....

      Mythbusters have proven it is possible to polish a turd!

      http://www.youtube.com/watch?v=yiJ9fy1qSFI

      ;)

      Garry
      gpolmateer@...
  • Even if its half the stated amount, its still staggering.

    And yes, missed opportunities MUST be part of the calculation. As a consultant this is something I preach about day in and day out to my clients. While your work force was off working on X what happens to y and z?

    To be honest, I am not shocked at the stated numbers at all. Staggering yes, surprising no. In the vast majority of companies, no department I can think of are allowed to fail as badly as the IT department. That however is coming to a close as companies are looking at results much harder than ever before.
    No_Ax_to_Grind
    • I could make up even scarier numbers

      Lets assume X and multiply it by assumed number Y then multiply by some random number from statistics and voila the scary number.

      Just wait and you'll see somebody trying to sell some kind of solution for the 6.2 trillion problem.
      paul2011
      • Its easy to see you don't do consulting. :-)

        If you did and seen the waste land of failed projects and lost opportunities I have you would understand.

        Thats not meant as a slam, its just that I see it all the time and deal with it on a daily basis.

        As to someone trying sell a solution, let me introduce myself. ;-)
        No_Ax_to_Grind
        • Yes, Let Me Introduce Him

          He's No_Ax, the guy who runs a nonexistent company in the hillbilly section of Missouri and his only claim to fame is a Power Point book he wrote back when a paperclip helped him do it, and you can't even find the book anywhere because it doesn't exist.
          itanalyst2@...
        • Another time that I agree completely with No_Axe

          You can give your best advice every step of the way and still the customer may choose to not listen.

          Rather like teenagers stubbornly repeating all the mistakes of humanity in hundreds of thousands of years of prehistory and history.

          I have a perspective on all this.

          http://philcardhu.vox.com/
          Cardhu