The true cost of mismanaged tech projects

To top managers at Levi Strauss, revamping the information technology system seemed like a good idea. The company had come a long way since its founding in the 19th century by a German-born dry-goods salesman: In 2003, it was a global corporation with operations in more than 110 countries.

But its IT network was antiquated, a balkanised mix of incompatible country-specific computer systems. So executives decided to migrate to a single SAP system and hired a team of Deloitte consultants to lead the effort. The risks seemed small: The proposed budget was less than US$5 million (S$6.4 million).

But very quickly, all hell broke loose. One major customer, Walmart, required that the system interface with its supply chain management system, creating additional hurdles. Insufficient procedures for financial reporting and internal controls nearly forced Levi Strauss to restate quarterly and annual results.

During the switchover, it was unable to fill orders and had to close its three US distribution centres for a week. In the second quarter of 2008, the company took a US$192.5 million charge against earnings to compensate for the botched project - and its chief information officer, Mr David Bergen, was forced to resign.

A US$5 million project that leads to an almost US$200 million loss is a classic "black swan". The term was coined by our colleague Nassim Nicholas Taleb to describe high-impact events that are rare and unpredictable but in retrospect seem not so improbable.

Indeed, what happened at Levi Strauss occurs all too often and on a much larger scale. IT projects are now so big and they touch so many aspects of an organisation that they pose a singular new risk.

Read the full article by Bent Flyvbjerg, BT Professor and founding chair of major program management at Oxford University's Said Business School and Alexander Budzier, a consultant at McKinsey & Co.