Canada: Managing IT Project Failure Risk

Studies consistently show that a significant portion of IT projects either fail completely or are late, over budget or do not deliver expected benefits. The risk of IT project failure is due in part to the conventional IT procurement process, which often requires customers to make important procurement decisions based upon incomplete and inaccurate information, and to accept the risk of project failure. An alternative approach to IT procurement can avoid unnecessary risks of project failure to the benefit of both customers and IT vendors and service providers.

Sophisticated IT solutions are often based on commercial off-the-shelf ("COTS") technologies and implementation services provided by one or more technology vendors and IT service providers. The typical implementation project usually involves a detailed analysis of the customer's requirements (known as "discovery"), identification of gaps between the customer's requirements and the out-of-the-box functionalities of the COTS technologies (known as "gap analysis"), determination of the optimal way to close each identified gap - usually through technology customizations/enhancements, changes to the customer's requirements or both (known as "design"), and the development and deployment of the COTS technologies and required customizations/enhancements (known as "development/deployment").

IT vendors and service providers (who are often independent parties) typically take the initial position (for contract negotiation purposes) that the customer must irrevocably purchase licenses to the COTS technologies and commit to the implementation project before the vendors or service providers perform the discovery, gap analysis and design work necessary to determine the extent and cost of the required development/deployment work. This means that the customer must make key business and financial decisions based on incomplete and potentially inaccurate information about the likely benefits of the COTS technologies (which information is often derived from limited product demonstrations and documentation and references from other customers) and assurances given by the vendors or service providers about the required implementation services (which assurances are customarily disclaimed as non-binding in standard form contracts used by vendors and service providers).

This conventional approach to IT procurement presents obvious risks to the customer - an IT project that either fails completely or costs more, takes longer or provides fewer benefits than initially expected. There are also risks to IT vendors and service providers, including unexpected costs, delays and disputes with unhappy customers. IT vendors and service providers usually attempt to shift those risks to the customer through contractual liability limitations, disclaimers and other provisions that restrict the customer's rights and remedies for project failure and contract breach, and which treat as separate transactions the licensing of the COTS technologies (under contract with IT vendors) and the provision of implementation services (under contract with service providers). Those contractual provisions and other practical considerations usually deter customers from invoking their legal rights and remedies, and compel customers to reluctantly pay more, wait longer and accept fewer benefits from the IT project.

In many situations, the risk of IT project failure and resulting disputes can be substantially reduced if the discovery, gap analysis and design work is completed before the customer is required to decide whether or not to irrevocably purchase and implement the COTS technologies. This approach allows the customer to make key decisions based on accurate information and realistic expectations. This approach is also fair to IT vendors and service providers, because the customer pays for the discovery, gap analysis and design work, and reasonable contractual restrictions (such as a break fee) deter the customer from opportunistic project termination. The resulting reduction in IT project failure rates would provide obvious benefits to customers and to IT vendors and service providers.

Complex IT projects present inherent risks. Nevertheless, the risk of project failure can be reduced and reasonably managed through a procurement process that allows customers to make key decisions with accurate information and realistic expectations. Businesses undertaking complex IT procurement are well-advised to consider these issues when negotiating with IT vendors and service providers.

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