The curse of ‘zombie projects’: How they erode value for money and what we can do about them
Energy and utilities organisations are managing large portfolios of change across many projects and programmes. These range from engineering design, construction, maintenance, IT implementation, decommissioning, digital and data transformation, research and development – this list goes on.
With so many different projects it can be extremely difficult to know whether an organisation is maximising value for money, i.e. prioritising spending money on projects and programmes that add the most value (per unit of investment) towards the organisation’s mission.
Articulating the value of individual projects and programmes is hard – benefits are difficult to forecast, especially with cost and schedule baselines that are uncertain; as can be the case with energy and utilities organisations, especially those managing large complex aging portfolios of physical assets – think transmission and distribution network operators, water companies, nuclear decommissioning. These organisations face significant challenges around, among other things, asset degradation which leads to unpredictable changes in asset health as they degrade over time.
Not only this, but the realisable benefits of a project or programme can change as the project evolves, as the internal and external environment changes. This again is particularly acute in energy and utilities as the timeframes associated with large capital investments are so long. This leads to a somewhat hidden problem: projects that are no longer beneficial are not killed – they are left to continue, using up constrained budgets and reducing the ability of the organisation to maximise value for money against its mission. The purpose of this article is to surface this issue and to propose a number of ways to avoid it.
The curse of the zombie project
In 2015 a Harvard Business Review article defined a brilliant term: ‘Zombie Projects’. The article explained that “zombies are projects that, for any number of reasons, fail to fulfil their promise and yet keep shuffling along, sucking up resources without any real hope of having a meaningful impact on the company’s strategy or revenue prospects.”. These zombie projects erode value for money as they:
- Absorb financial investment which reduces what’s left for more value adding projects and programmes
- Absorb personnel, and on some occasions the best personnel who are brought in to ‘save’ the project or programme
- Absorb the attention of senior leadership teams in trying to get them back on track
- Reduce the overall value that the organisation is delivering and dilute progress towards its mission.
There have been numerous studies that place the average percentage of wasted investment within portfolios of projects (due to projects not delivering their promised benefits) as between 10 percent and 70 percent. In one 2018 study The Project Management Institute (PMI) estimated that organisations worldwide wasted an average of $97 million dollars of every $1 billion dollars spent, whilst a study from primary research organisation Standish Group found that only 29 percent of IT projects were considered successful.
Projects can deliver less value than anticipated for three key reasons:
- Biases in costs and/or benefits: For instance optimum bias or confirmation bias from the project/programme team, who are emotionally invested and wish to see the initiative continue can lead to incorrect forecasts of cost or benefit.
- Environment change over time: At the outset of a project key assumptions are made that inform the forecasted costs and benefits. Over time the environment can change, be that the external environment (e.g. the political or social landscape) or the internal environment (e.g. the organisational mission or structure). Due to these changes, assumptions made at the outset can become incorrect and the actual value a project will deliver reduces.
- Project underperformance: Put simply, a project fails to deliver the outputs it intended to and hence realises less value than promised, meaning it becomes a sub-optimal investment.
We should stop accepting that it’s impossible to kill zombies
Stopping project and programmes that have either run for a long time or have invested significant amounts of money can be extremely difficult. Organisations may not have the processes in place to adequately control the launch, review, and closure of projects. They may not have the data available to inform key decisions on the forecasted value. Also, they may not have strong enough governance with the accountability and courage to say “stop”.
We pose that the issue of zombie projects is particularly acute for energy and utilities organisations due to the fact they:
- Are either publicly funded or economically regulated – meaning that demonstrating value for money is a top priority
- Are very diverse in their scope, objectives and context, meaning comparison of value is extraordinarily difficult
- Have lengthy project timescales meaning that the basis up on which benefits were defined in the original business case is likely to change, potentially reducing project benefit significantly by the time it is complete
- The complexity of managing aging assets with constrained funding whilst simultaneously managing new capital investments in infrastructure – responding to increased demand brought about by the energy transition.
Despite this, we believe organisations should tackle this issue head on, because the benefit of streamlining a portfolio of projects and programmes can be huge – unlocking funding and resources for high value investments and driving value for money.
How can energy and utilities organisations address the issue of zombie projects?
Unfortunately, zombie projects are never going to be avoided entirely. Portfolios of projects and programmes are often complex, with significant internal and external interdependencies that are changing all the time in today’s world which is volatile and uncertain. This causes unpredictable impacts, which can often render cost-benefit analyses undertaken at the business case stage invalid. Also, many other issues exist that make zombie projects very difficult to notice – which makes dealing with them even harder. The points above are not intended as a criticism of energy and utilities organisations, as most companies suffer with this issue to some varying degrees. In fact, we argue that due to the nature of managing aging asset portfolios in a constrained funding environment, these zombie projects are harder to identify and stop.
Nevertheless, in pursuit of helping to improve the way organisations within the energy and utilities sector approach the management of their investments, below we outline four key actions that all organisations can take to alleviate the impact.
1. Acknowledge that zombie projects exist and they are a drain on constrained resources
The first step for leaders is to acknowledge that there are likely zombies with their organisation’s portfolio of projects and programmes. The next step is to commit to understanding the scale of the problem and then to initiate action to address any zombies that are discovered. Depending on the organisation this may require a shift in mindset, a change in processes, new data sources, or all three.
2. Implementing strong portfolio management, starting with robust processes and governance
Managing aging assets whilst concurrently developing new infrastructure is complex and this manifests in organisations having to manage large portfolios of projects (change) and operation (business as usual) concurrently. Organisations need to have a good grip on the ‘formal’ projects and programmes within their portfolio (i.e. captured in a work breakdown structure) but also acknowledge there are many informal or shadow projects being worked on by the workforce. Portfolio management is a strategic discipline that is focused on balancing investment of resources (financial, people etc) in projects to maximise overall return (value). Having the right processes in place can enable consistent and robust data-driven identification and tracking of project/programme costs and benefit realisation, which in turn support objective, rather than subjective, assessment of whether a project is likely to deliver less value than predicted. A key point here is that processes and systems need to be supported by strong governance – leaders need the authority to say “stop”.
3. Defining what value is and applying an intelligent way to compare different projects
A key enabler is being able to assess different projects consistently and objectively for their cost and benefit, in order to compare and prioritise constrained resources on those projects that will deliver the most value for money. This can be difficult in energy and utilities organisations due to the large variation in types of projects (construction, decommissioning, maintenance, digital transformation, IT implementation etc), plus the fact that very large projects only take place every few years. But without comparison, there can be no optimisation of a portfolio. The North Sea Transition Authority (NSTA), responsible for overseeing the decommissioning of Oil & Gas assets in the North Sea, has implemented a range of initiatives designed to create more transparency between projects delivered by different organisations so that projects can be better forecasted and compared. The sector could, and should, learn from initiatives like this.
4. Recognising that it’s not just a process issue – it’s also cultural
In addition to having robust processes in place that rigorously define the costs and benefits of projects/programmes at the outset and track them throughout, organisations should recognise that stopping zombie projects also requires the right type of culture. Project teams are emotionally invested in their initiatives and hence suffer from a range of biases including optimism bias and confirmation bias. In addition, some projects invest significant sums of money and these ‘sunk costs’ can be distracting when deciding whether to stop a project. In addition, leaders may feel reluctant to kill projects they have approved for fear it will harm their reputation. Leaders can encourage this type of culture by fostering a psychologically safe environment. This means empowering people to raise the flag when the forecasted benefits of a project decrease, and must include leaders demonstrating accountability for decisions, whether good or bad.
Energy and utilities organisations are susceptible to zombie projects due to the timeframes involved, the complexity and the variation within portfolios of projects. These projects can drain constrained resources and dilute the value for money these organisations are able to deliver. This article is not a critique of these organisations but rather a call to action for to adopt more rigorous and courageous approaches to making hard decisions to stop projects. Part of the solution is adopting portfolio management within the organisation’s operating model, but this crucially must be accompanied by the cultural and behavioural changes to ensure it is effective. Energy and utilities organisations should take comfort in the fact that zombie projects exist within all types of organisations, and there are some key actions that can be taken, as well as helpful examples that can be learned from.