(Loren Nickel is the regional director and actuary for the Northwest region of Aon.)

“There is an epidemic failure…to understand what is really happening. And this leads people…to misjudge their players and mismanage their teams….Using the stats the way we read them, we'll find value…no one else can.”

Peter Brand in Moneyball

The saddest scene in the movie Moneyball is also the funniest: a roomful of baseball scouts—long in experience, cocksure in their expertise—spouting wisdom everybody but they knows to be nonsense.

When life imitates art, however, things are not quite so amusing. Failed IT projects destroy value on a massive scale. Like Billy Beane in the baseball scouting room, business leaders find themselves listening to IT vendors and consultants who are not only wrong, but part of the problem.

Traditional efforts to improve IT performance treat project delivery as an operational endeavor driven by technologists. Progress, these technologists say, lies in ever more complex implementation methodologies. An IT project is a business endeavor that must be evaluated in financial terms, both as a standalone effort and in relation to other efforts competing for resources.

Moreover, a client's or vendor's projects represent a rolling collection of endeavors. They are best analyzed and managed as a portfolio. The data, insights and opportunities generated by a financial portfolio approach constitute Moneyball IT. Proof of success will not only come through better project delivery and business ROI but the ability to insure IT projects for timeliness adherence to budget and full functionality.

A Cross-Functional Approach

Successful project management in other complex project areas—such as transportation, construction and healthcare—show that miscommunication and misalignment among project stakeholders generate the majority of large-scale failures.

Moneyball IT combines independent, technically expert project evaluation with proven insurance risk management techniques. This approach is cross-functional, involving and communicating with all project stakeholders as well as forcing transparency and accountability. The goal is to give CEOs and CFOs operational insight into—and financial control over—delivery.

Underwriting

Moneyball IT underwriting puts a revealing spin on delivery risk. Typically, project stakeholders focus on the details of getting things right. Underwriters, on the other hand, look at the financial impact to the client's business should things go wrong. This viewpoint enables underwriters to see and manage risks that conventional IT best practices miss.

Technical underwriters provide an extra expert and unbiased set of eyes overlooking project design and execution. Translating operational risk into financial metrics creates a common language among project stakeholders that reduces miscommunication.

This common language also aligns stakeholders by exposing agendas and forcing stakeholders to assume and pay for risks arising from their requirements. Quantifying risks allows stakeholders to adjust individual project features while enabling finance departments to allocate resources across projects based on risk-adjusted return.

Eliminate Excuses and Exposures

Since delivery is hard, there will always be overruns, delays, and impairments. By analogy, over time, even the best managed, best equipped, and best staffed trucking fleet will have accidents.

As with auto-transport risk, portfolio-based underwriting for IT projects creates transparency and accountability. Tracking outcomes across a portfolio uncovers root causes whose existence or significance might not be knowable at the individual project level. Across the portfolio, aggregate impacts can be measured and correlations among factors determined.

Most importantly, the portfolio approach leaves nowhere to hide. On any particular project, IT or vendors can give a plausible, exculpatory reason as to why the project did not succeed. Many excuses that might work on any single project do not hold water across a statistically significant number of projects. Once identified, otherwise undetectable root causes can be addressed.

Field experience demonstrates that IT departments—even of global delivery firms—lack the incentive and skills for rigorous IT project portfolio analysis. Underwriting's financial transparency and a willingness to put skin in the game keeps these engineers and actuaries honest.

Insurance Risk Transfer

Insuring project delivery may seem outlandish, but companies already spend vast amounts of money on it with little-to-no transparency for the CEO or CFO.

Another way in which end users buy insurance is even more expensive: they hire blue-chip consulting firms. These firms typically cost at least 30 percent to 40 percent more than quality second- or third-tier firms. In exchange for this premium, blue-chip consultants make three implicit promises: 1) the consultant will not fail financially during the project period; 2) the consultant will commit additional resources to bring a troubled project back on track; and 3) if the consultant well and truly errs, it will use its deep balance sheet to make the client whole. Blue chip firms keep the first of these promises but rarely deliver on the second or third promises without a negotiation or fight.

With Moneyball IT, stakeholders develop loss histories and ratings that influence the cost of insuring the projects in which they participate. Stakeholders therefore have very strong long-term incentives to perform individually and to take part in process improvements that require collective action.

The underwriter will be assessed by how accurately he predicted and priced overall project losses. This figure is expressed by the loss ratio, or losses as a percent of reserves and premium paid. As a straightforward, aggregate financial metric, the loss ratio matches the way CEOs and CFOs are judged and leaves the underwriter himself with nowhere to hide.

Where the company obtains risk transfer via reinsurance, the underwriter has skin in the game. Insurance represents an investment by the carrier in the quality of insured's operations, in this case delivery. The underwriter profits when delivery performs well, and he pays out when it does not. Between underwriter and company, this means alignment, transparency, and accountability.

Buy the Wins

IT projects are a means to an end, which are driving business results.

Moneyball IT's first win is preventing IT projects from destroying value to the extent they currently do. The worst two percent to five percent of troubled projects account for 40 percent to 60 percent of cost overruns. This means that fixing or forestalling a small percentage of these projects dramatically improves IT productivity. Higher success rates also accelerate launch of revenue-producing business initiatives while freeing up resources for additional projects.

A second win comes from CEOs and CFO shaving an independent view of their organization's IT risk at the project and aggregate levels. This view allows business leaders to prioritize and track projects based on risk-adjusted return.

Finally, greater visibility combined with insurance gives CEOs and CFOs the financial headroom to take on new kinds of projects while protecting the balance sheet via transfer of excess risk.

Play ball.

(Loren Nickel is the regional director and actuary for the Northwest region of Aon. He is responsible for providing clients with actuarial support as well as a variety of financial and tailored risk services. His work includes pricing, reserving, profitability studies, retention studies, dynamic financial analysis and captive analysis for all major lines of insurance.)

Special Reports /

Saving Failed Insurance Technology Projects

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