What advice would you give a friend or business associate if they said to you, “I just heard about this great investment and I am really excited about it because it has so much potential. In order to get involved, I have to put a lot of money down. And the only negative seems to be that the return on investment (ROI) is zero.”
Seeing the absurdity of this potential opportunity, you would probably tell them not to invest. This scenario, as preposterous as it might seem at first, actually illustrates a common phenomenon or trend that is happening to companies worldwide.
What is this trend? Companies are spending millions for business improvement projects whose costs will far out weigh their realized benefits. At first glance this might even seem difficult to believe much less be accurate. That is, until you begin to look at the evidence. In this article the authors look at over ten years of independent studies that show the average rate of return on all large project implementations is negative. The review of the studies begins with the McKinsey study, in which the projects of over 40 companies were investigated. From the results of this and the other studies, this article will begin an inquiry that will help to answer the following questions:
- Why are so many companies making the same mistake?
- What could companies who do not want to fall into this trap do differently?
The Common Project Success Denominator
The McKinsey study examined many project variables and in particular, the effect of an Organizational Change Management (OCM) program on a project’s ROI. The study showed the ROI was:
- 143 percent when an excellent OCM program was part of the initiative;
- 35 percent when there was a poor OCM program or no program.
What do those these results mean? A 143 percent ROI means that for every dollar spent on the project the company is gaining 43 cents. On the other hand, a 35 percent ROI means that for every dollar spent they are losing 65 cents.
The 11 most unsuccessful companies in the McKinsey study had poor change management, which showed up as the following:
- Lack of commitment and follow through by senior executives;
- Defective project management skills among middle managers;
- Lack of training of and confusion among frontline employees.
The 11 most successful companies in the study had excellent OCM programs:
- Senior and middle managers and frontline employees were all involved;
- Everyone’s responsibilities were clear;
Reasons for the project were understood and accepted throughout the organization.
Measuring A Project’s Return on Investment
For a project to get approved, there has to be a compelling business case. A business case looks at the cost of improvement project and weighs that against the benefits the company will gain. If the benefits outweigh the costs, the ROI is positive and thus the project is approved.
The formula for calculating Return on Investment (ROI) is:
The Benefit Of Project is based on the project’s purpose. The purpose could range from increasing sales to reducing the cost of handling customers. One generally estimates that making certain changes to the business, installing new software, making processes more efficient, etc., will yield a particular project benefit that has a dollar amount associated with it.
The Project Cost includes hard costs, such as hardware and software, as well as what is sometimes termed soft costs. While the paradigm for many accounting systems has not shifted, the research also shows that these so-called soft costs are actually as or more important to a project’s success than the hard costs. As a result, these costs should no longer be termed soft costs because they have a defined, bottom-line effect.
Soft costs, for example, can include items such as the salaries for the time period people are on the improvement project. Salaries are important to include because the time employees spend on the improvement project should be seen as a cost to the organization. The longer the project takes, the longer employees will be away from their primary job whether it is sales, marketing or manufacturing. If they are working on an improvement project, they cannot spend the same amount of time they normally would on their regular job.
If a project experiences delays due to politics, lack of planning, unforeseen issues, or other reasons, as is often the case, the overall cost of the project increases because the time to implement the project has gone beyond the original estimate. As the costs increase, any potential benefit starts to be chipped away and in some cases more money is spent on the improvement than the improvement ends up providing. An organization that does not consider soft costs as hard costs is putting the organization at a huge financial risk because the project’s scope, timeline and therefore budget increase (Figure 1). Within this context of project ROI, the following section will examine more studies that have evaluated the success or failure of project implementations and their ROIs. Again, in this context ROI is taken to mean that the project provides more financial benefit than it costs the organization in a reasonable time period.
Figure 1: Increased scope, timeline, and budget put an organization at risk because they erode the project’s potential benefits.
The Survey Says: No Change Management Means Poor Project Results
Over the past 20 years of implementing projects, the authors have collected our own data and case studies as well as collected research from independent groups. Disappointing implementation results are being reported in all kinds of projects: Customer Relationship Management (CRM), Contact Centers, Enterprise Resource Planning (ERP), Share Services, Supply Chain, mergers and acquisitions, new pricing strategies, cost reduction initiatives, and including changes in a university’s method of recording hourly wages. The following examples show the trend that no project is immune to ROI failure, regardless of who conducts the study.
Results of a study by Boston Consulting Group that examined 100 large companies found the following:
- 52 percent reported achieving their business goals
- 37 percent could point to a tangible financial impact for their projects
A study entitled Six Ways IT Projects Fail published in Darwin (2001) revealed the reasons were due to the following:
- Lack of executive sponsorship
- Lack of early stakeholder input
- Poorly defined or changing specs
- Unrealistic expectations
- Uncooperative business partners
- Poor or dishonest communication
A study published in DestinationCRM.com (August 2003) entitled Six Barriers to CRM Project Success showed that the failure of CRM projects was due to the following:
- Lack of guidance
- Integration woes
- No long-term strategy
- Dirty data
- Lack of employee buy-in
- No accountability
In 2004, a study entitled Software Disasters Are Often People Problems was published on CNN.com. This study showed that at that time serious, preventable errors were related to poor management of the people part of the project. For example:
- Passengers wait at McCarran International Airport in Las Vegas on September 14 for flights delayed by a communications system failure.
- New software at Hewlett-Packard Co. was supposed to get orders in and out the door faster at the computer giant. Instead, a botched deployment cut into earnings in a big way in August and executives got fired.
- Retailer Ross Stores Inc.’s profits plummeted 40 percent after a merchandise-tracking system failed.
The study’s conclusion was that even as systems grow more complicated, failures are related less to technical malfunctions and more due to bad management, communication, or training during project implementation.
Gartner’s industry analysts report a staggering 55 to 70 percent of CRM projects fail to meet their objectives. In Bain and Company’s survey of 400 executives, 20 percent of respondents felt their CRM initiatives actually damaged customer relationships. When the objective is to build strong relationships with customers, why is this goal eluding so many companies especially when they are spending millions and sometimes billions to reach it?
What Is Failing?
In contrast to these studies about the people part of business, a Forrester Research study showed that companies implementing, for instance, a new technology like CRM, are satisfied with the actual software application’s functionality and capability.
So, if the technology is not failing, what is? A study done by ProSci, a recognized leader in change management research, again pointed to the ability of the organization to efficiently and effectively manage the changes the project was bringing about in the organization. The ProSci results showed that a project’s greatest success factors are the following:
- Effective and strong executive sponsorship
- Buy-in from front line managers and employees
- Exceptional teams
- Continuous and targeted communication
- Planned and organized approach
The ProSci study results also showed that a project’s greatest obstacle factors are:
- Employee resistance at all levels (Surprisingly, the effectiveness or correctness of the actual business solution, process, or system changes was cited only 5 times in over 200 responses.)
- Middle-management resistance
- Poor executive sponsorship
- Limited time, budget, and resources
- Corporate inertia and politics
Another study by AMR Research, a firm whose analysts focus on independent, leading-edge research that bridges the gap between business and their technology solutions, found companies that had successful software implementations spent 10 to 15 percent of their project budget on OCM. All of the success criteria found in each of these studies is what comprises an OCM program that increases a project’s ROI.
Organizational Change Management (OCM)
These studies show that many different analysts and research companies have found very similar results. Clearly, continuing to deploy projects without change management is not a profitable way to do business. The purpose of OCM is to mitigate the risks of a project, including costs, scheduling, and performance. OCM does this by facilitating greater economic value faster by effectively developing, deploying, and aligning the company’s assets for a given project.
As businesses face shrinking margins, global competition, and the need to deliver on loyalty-creating customer experiences, they will also face the need to change the way they do business. As companies evaluate improvement projects they should consider the financial contribution that OCM makes.
While there has been some skepticism on behalf of the business community to accept OCM as a necessary business discipline, as seen in the McKinsey, ProSci, and AMR studies, as well as from the authors’ collective experiences and research at Hitachi Consulting, clearly some OCM methodologies work. In a future article the authors will address why not all OCM methodologies produce the high rate of return for the money spent on them, and how OCM actually reduces the risk of a project and keeps it on schedule with regard to budget and scope.
 “Change Management That Pays,” McKinsey Quarterly, 2002.
 Integrating, People, Process and Technology. by Anton, Petouhoff and Schwartz, Santa Maria, CA: The Anton Press, 2003.
 Boston Consulting Group. (2003). Research study. In Integrating, People, Process and Technology. by Anton, Petouhoff and Schwartz, Santa Maria, CA: The Anton Press, 2003.
 Ulfelder, Steve. (2001). “Six Ways I.T. Projects Fail And How You Can Avoid Them.” Darwin magazine. Retrieved June 2001, http://www.darwinmag.com/read/060101/dirty.html.
 Myron, David. (2003). “6 Barriers to CRM Success And How to Overcome Them.” DestinationCRM.com, August. Retrieved from http://www.destinationcrm.com/articles/default.asp?articleid=3316.
 “Software Disasters Are Often People Problems.” Retrieved Tuesday, October 5th, 2004, CNN.com.
 Research study by Bain Consulting Group. Integrating, People, Process and Technology. by Anton, Petouhoff and Schwartz, Santa Maria, CA: The Anton Press.
 Ibid. Research study by Forrester Group.
 ProSci. (2003). “Best Practices in Change Management.”
 AMR Research Report, 2003.
 Change Management Case Studies, Hitachi Consulting, http://www.hitachiconsulting.com/page.cfm?SID=2&ID=searchresults&searchString=change+management.