What if you learned that most of your capital projects are performing 20 percent lower than reported?
Columbia Business School made news in November with research showing that, on average:
- Women’s memories exaggerate prior accomplishments by 15 percent.
- Men’s memories inflate prior performance by 30 percent!
Columbia concludes that, because men’s accomplishments sound better in interviews and performance reviews, men are more readily hired and promoted.
What also strikes me is that, averaging the results of men and women, our minds inflate memories of our performance by 20 to 25 percent! This over-reporting of past accomplishments is not intentional… it is truly innocent “mis-remembering” (although adding incentives worsens the problem).
CFOs report their greatest dissatisfaction in the capital budgeting process is inadequate project follow-up and relying too heavily on subjective reports of benefits actually realized.
The CFOs’ instincts are right on the money. According to Columbia’s research, our most well-intentioned people will regularly overestimate a project’s performance by 20 to 25 percent. That’s the difference between a C+ and an A+!
Unfortunately, the status quo is self-perpetuating:
- Memories overestimate the success of projects.
- Inflated perceptions of success reduce the urgency for improving follow-up (and other decision disciplines)
- Other visible management priorities trump working on follow-up.
- Reliance on memory continues.
Rising Above The Din
Most CFOs confirm that improving follow-up is on their “need to do” list, but it has been there for a long time. Organizations will remain stuck until the CFO or CEO draws a line in the sand and demands action. Whether using their own staff or outside expertise, companies need to dig in to find out the truth.
- Start with a random sample of recently completed project.
- Ask the project teams to provide current estimates of their projects’ benefits (without telling them about the next step).
- Engage an independent analysis of actual benefits of those projects.
- Compare the estimates from the actuals
Two very strong points of caution: First, this cannot be done in the spirit of a witch-hunt or as a “gotcha.” Ideally, have an outside party gather and aggregate the information so variances of individual teams are never disclosed.
Second, analysis of actual benefits is usually very difficult if follow-up was not planned for. Information is often lost or confusing and it is difficult to separate the impacts of the project from other events. Expect a degree of ambiguity.
Despite the challenges, sampling a handful of projects is invaluable. It provides the information senior leaders need to determine whether a serious problem exists and elevating the issue for attention and action.
© 2011 Verax Point Consulting, LLC