Proactive response how financial services firms deal with troubled projects

Proactive response: How mature ﬁ nancial services ﬁ rms deal with troubled projects is an Economist Intelligence Unit research report, sponsored by Oracle.. An Economist Intelligence Uni

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deal with troubled projects

A report from the Economist Intelligence Unit

Sponsored by Oracle

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Preface 2

Contents

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Proactive response: How mature ﬁ nancial services ﬁ rms deal with troubled projects is an Economist

Intelligence Unit research report, sponsored by Oracle The ﬁ ndings and views expressed in the report

do not necessarily reﬂ ect the views of the sponsor The author was Sarah Fister Gale and the editor was Brian Gardner

July 2011

Preface

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Tighter rules and greater regulatory oversight are a major outcome of the ﬁ nancial crisis as regulators are introducing a spate of new rules designed to increase accountability These new rules, including Basel III and the Dodd-Frank Act, may reduce systemic risks, but they are also driving up the costs of

ﬁ nancial institutions According to the article, “Chained but untamed”, in The Economist’s May 12th

special report on International Banking, new requirements for larger capital cushions could reduce banks’ profi tability by as much as one-third, while pushing up borrowing costs for consumers and businesses Financial organisations that can meet compliance requirements while simultaneously providing their customers with new innovative products and services will fl ourish in this environment, while their peers will continue to suffer Unfortunately, few institutions in this industry have the project management maturity to meet project goals with any level of consistency An Economist Intelligence Unit survey, conducted in April 2011, shows that only 17% of fi nancial services organisations deliver projects on time—and only 20% deliver projects on budget—at least 90% of the time

To investigate how fi nancial services fi rms identify and deal with project failure and which strategies help them to achieve greater project success, the Economist Intelligence Unit conducted a global survey, sponsored by Oracle, of 400 senior executives in the fi nancial services industry The key fi ndings are highlighted below

Executive summary

About the survey

The quantitative ﬁ ndings presented in this report are based on an online survey conducted by the Economist Intelligence Unit in April 2011 A total of 400 senior executives from the ﬁ nancial services industry participated in the survey, of which 54% are C-suite or

above Over 270 respondents belong to organisations with over US$500m in annual revenue, including

141 from organisations with over US$5bn in annual revenue Around 31% of respondents are based in Europe, 31% in the US and Canada, 30% from the Asia-Paciﬁ c region, and the remainder from the Middle East, Africa and Latin America

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Although many ﬁ nancial services ﬁ rms have immature methodologies in place, most executives recognise that the ability to identify and deal with the early signs of project failure would be valuable

to their organisations As Chart 1 shows, they rank the key beneﬁ ts of early action as helping them better use limited resources (61%), improving their on-time and on-budget project success rate (40%), and allowing them to gain a competitive advantage over their peers (37%)

However, although these responses suggest that executives see the value of embracing more mature project portfolio management practices, the results in the chart above show that they do not fully recognise the longer-term strategic beneﬁ ts that such methods can provide

For example, only 6% of ﬁ rms recognise how such project portfolio management rigour could enable them to position their businesses more strategically through market expansion and new product launches, even though this is one of the long-term strategic beneﬁ ts of delivering projects successfully According to Brett Pitts, senior vice president and group manager for internet portfolio management

The beneﬁ ts of early response are clear

Better use of limited resources Better on-time and on-budget project success rate Ability to gain a competitive advantage over their peers Better evaluation of opportunity costs

Improved customer confidence and loyalty Ability to deliver more projects with the same budget Ability to invest in riskier projects

Avoidance of regulatory compliance issues Ability to extend their reach into new geographic or product markets Other

Chart 1

In your opinion, what are the greatest benefits that financial services organisations derive from identifying and dealing with project failure early in the project delivery process?

Select up to three.

(% respondents)

Source: Economist Intelligence Unit survey, 2011.

61 40

37 28

25 23 17

16

6 1

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at Wells Fargo in San Francisco, “If you have a mature discipline that is geared towards managing risks and planning contingencies, you don’t have to be unduly conservative in your pursuit of business opportunities.”1

Unrealistic goals are the most common reason for unsuccessful projects in ﬁ nancial services ﬁ rms (40%), followed by poor alignment between project and organisational goals (37%), and a lack of necessary human resources (34%), according to our survey (Chart 2) These are all problems that a rigorous project portfolio management methodology would identify and address during the planning stages of a project

1 Economist Intelligence

Unit, Pre-emptive action:

Mitigating project portfolio

risks in the financial services

industry, February 2011,

sponsored by Oracle.

Unrealistic project goals Poor alignment between project goals and organisational goals Inadequate human resources

Lack of strong leadership Unwillingness among team members to point out problems Ineffective risk management

Inadequate financial resources Change in oversight and governance Business case is no longer justified Regulatory compliance issues Discontinued partnerships

Chart 2

In your organisation, what are the most common reasons for project failure?

Select up to three.

(% respondents)

40 38 34

32 21

19 17 15 13

9 4

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Poor leadership, ineffective risk management and a culture in which people are unwilling to point out problems create additional challenges in managing projects successfully These ﬂ aws can lead executives to ignore troubled projects until they demand attention, and cause team members to avoid pointing out problems for fear of retribution

A lack of accountability for project success causes leadership to be apathetic, delaying involvement until cost and schedule overruns drive projects off course The survey shows that 28% of project sponsors wait until a project is in serious trouble before getting involved, and 7% never get involved, leaving project managers to deal with whatever issues occur This lack of action makes solving problems far more costly and difﬁ cult than it needs to be, diverting time and resources away from more beneﬁ cial opportunities

Apathy leads to trouble

They participate in regular progress reviews, and get involved if a problem arises that the project leader cannot solve They get involved only when the project is in serious trouble, and other attempts to solve it by the project team have failed They closely monitor project progress and milestone reviews, getting involved as soon as trouble arises

They do not get involved when projects start to fail, leaving it entirely to the project team to deal with the problems that occur Don’t know/Not applicable

Chart 3

In your organisation, at what point do executive stakeholders get involved in bringing a troubled project back on track?

(% respondents)

45 28

20

7 2

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Along with poor leadership accountability, many fi nancial services fi rms have inadequate response mechanisms for dealing with troubled projects As Chart 4 demonstrates, almost one-half of respondents (47%) say that in their organisation a formal response to failing projects does not occur until time and budget targets are offi cially missed Another 20% say senior executives in their organisation do not respond until the project is nearing its delivery date and is obviously going to fail

Even more alarming, 15% of organisations have no formal process whatsoever for dealing with a project in peril In these organisations, troubled projects are allowed to stumble on, sucking up valuable time and resources while failing to deliver expected results This lack of response mechanisms exacts a signiﬁ cant toll, causing these ﬁ rms to show the lowest project success rate—only 8% deliver projects on time and on budget 90% of the time or better

Financial services fi rms respond even more slowly when projects fall behind schedule targets, despite the fact that meeting deadlines, particularly on regulatory projects, is essential to their long-term viability Well over one-third (39%) of companies overall—and 45% of larger fi rms—wait until a project is more than 25% behind schedule before they react, at which point it is very diffi cult to bring an initiative back on track

Formal response: too little, too late

When pre-established targets for time and budget are not met When project team members and/or key stakeholders identify potential problems during planning that could interfere with success When signs of trouble arise, during early project reviews, but before the project goes over time or budget

When regular portfolio or stage gate review meetings are held When the project is nearing its delivery date and obviously going to fail When the project manager requests additional resources

When the sponsor requests a reassessment of project viability There are no formal processes to address project failure

Chart 4

In your organisation, which of the following events trigger processes to address project failure?

Select up to three.

(% respondents)

47 41

39 28

20 17 14 15 0

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Interestingly, the organisations with the most rigour in their project portfolio management process tend to be ﬁ rms with annual revenue of less than US$500m As demonstrated in Table 1 below, these smaller organisations respond to signs of trouble on projects earlier than their larger peers getting involved sooner when projects experience time or cost overruns

The agility of smaller organisations enables them to create a stronger culture of accountability and a more effective project portfolio management oversight process This can be more challenging for larger

ﬁ rms that are often hindered by the complexities of global collaboration and widely dispersed teams

Table 1

Project management rigour by company size

Projects exceed their costs by 25% or

more before triggering a response

Projects are delayed by 25% or more

before triggering a response Large companies

Small companies

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The discrepancy in optimism between organisations with mature versus immature project portfolio management strategies in this industry is not surprising, as organisations with poor project portfolio management methodologies have less success in delivering projects As already highlighted, only 17% of respondents overall say that their projects come in on time 90% of the time or better; the number jumps

to 35% among organisations that begin to address troubled projects before they fall behind schedule Smaller ﬁ rms again deliver better rates of success, bringing projects in on time and on budget more frequently than larger ﬁ rms, as demonstrated in Table 2 below

These results show that smaller organisations and those with mature project management methodologies—those that seek out and deal with potential concerns—are more successful than their peers They deliver more projects in less time for less money and perceive themselves to be more efﬁ cient, giving them an advantage over their competitors

Few companies hit time or budget goals

Table 2

What percentage of projects has your organisation delivered on budget and on schedule in the last two years?

Project success rates by organisation size 90% or more

on budget

90% or more

on schedule

Less than half

on budget

Less than half

on schedule Small companies

Large companies

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Failure to deal with troubled projects early has the biggest impact on implementing regulatory initiatives, which are of central importance for ﬁ nancial services executives Missing these targets can cause a bank to lose its licence and permanently damage its reputation among investors

“The consequences of failure on these projects are dire,” says Mr Pitts of Wells Fargo, quoted in the earlier report “It’s not even vaguely an option.” Consequently, when these projects ﬂ ounder, organisations have no choice but to funnel resources away from other projects to bring them back in line—even if it means pulling people from more successful endeavours that offer better returns

This is where organisations with mature project portfolio management capabilities have a competitive advantage These high-performing organisations can more conﬁ dently deliver projects on time and on budget, so they are less burdened by regulatory demands As a result, respondents who rank their ﬁ rms

in the top two tiers of project portfolio management effi ciency are more likely to say that regulatory projects are a necessary step in achieving business effi ciency (51%) In comparison, those who rank their organisations in the bottom three tiers of project portfolio management effi ciency are more likely to view these projects negatively: 40% of these respondents say that regulatory projects require more fi nancial resources than originally allocated to bring them in on time; and 38% say compliance projects reduce their organisation’s ability to invest in its growth and success

Mature project management drives regulatory optimism

They ensure the efficient functioning of our business

They reduce our ability to invest in our growth and success as we are forced to carry out more regulatory projects

They often require more financial resources than are originally allocated to bring them in on time

Chart 5

In your opinion, what are the impacts of compliance projects on your company’s overall portfolio management process?

(% respondents)

Top two tiers Bottom three tiers

51 31

30

38 29

40

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Good response mechanisms reduce the stress of regulatory projects on organisations and give businesses greater confi dence in their ability to deliver these and all projects more effectively This ability will be vital in coming years as the industry adapts to re-regulation Conversely, organisations with less mature project portfolio management practices have lower rates of project success than their peers, and their executives have less confi dence in how these projects can benefi t their business

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Financial services executives understand the ﬁ nancial and strategic value that successful project execution brings to their organisations Yet many organisations have yet to optimise their project portfolio management processes, their leadership structure and culture of accountability to realise these beneﬁ ts

The organisations that are able to implement more rigorous project tracking mechanisms and respond proactively to early signs of trouble can gain a competitive advantage over their peers, from not only

a strategic perspective but a regulatory perspective as well These tools will give them the agility and efﬁ ciency to deliver more projects with fewer resources, and enable them to take on higher-risk projects with the conﬁ dence that they are able to deal with whatever problems that may arise

Conclusion

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