Guest Post by Gleb Tsipursky
You probably heard the business advice of “failing to plan is planning to fail.” That phrase is a misleading myth at best and actively dangerous at worst. Making plans is important, but our gut reaction is to plan for the best-case outcomes, ignoring the high likelihood that things will go wrong.
A much better phrase is “failing to plan for problems is planning to fail.”
To address the very high likelihood that problems will crop up, you need to plan for contingencies.
When was the last time you saw a major planned project suffer from a cost overrun? Likely it was the last project you worked on. It’s uncommon for a project to come in at budget no matter how clear the plan is.
For instance, a 2002 study of major construction projects found that 86% went over budget. In turn, a 2014 study of IT projects by the Standish Group found that only 16.2% succeeded in meeting the original planned resource expenditure. Of the 83.8% of projects that did not, the average IT project suffered from a cost overrun of 189%.
Such cost overruns can seriously damage your bottom line. Moreover, cost overruns often spiral out of control, resulting in even bigger disasters. Let’s say you’re an IT firm that draws the extra money from your cybersecurity budget. As a result, you left yourself open to hackers who successfully steal customer data, resulting in both bad PR and loss of customer trust.
The Planning Fallacy
What explains cost overruns? They largely stem from the planning fallacy, our intuitive belief that everything will go according to plan, whether in IT projects or in other areas of business and life. The planning fallacy is one of many dangerous judgment errors – what scholars in cognitive neuroscience and behavioral economics call cognitive biases – that we make due to how our brains are wired.
Four Research-Based Techniques to Avoid the Planning Fallacy
1. Anticipate what problems might come up and address them in advance through prospective hindsight where you envision yourself in the future looking back at potential challenges in the present. This technique involves recognizing that you can’t anticipate all problems, and building in a buffer of at least 40% of the project’s budget in additional funds. If things go better than anticipated, you can always use the money for a different purpose later.
2. Break down each project into component parts. An IT firm struggled with a pattern of taking on projects that ended up losing money for the company. By evaluating the specific component parts of the projects that had cost overruns, we found that the biggest unanticipated money drain came from permitting the client to make too many changes at the final stages of the project. As a result, the IT firm changed their process to minimize any changes at the tail end of the project.
3. Use your past experience with similar projects to inform your estimates for future projects. A heavy equipment manufacturer had a systemic struggle with underestimating project costs. In one example, a project that was estimated to cost $2 million ended up costing $3 million. Make it a requirement for project managers to use past project costs to inform future projections. Doing so resulted in much more accurate project cost estimates.
4. For projects with which you have little past experience, use an external perspective from a trusted and objective source. A financial services had outgrown its current building and the CEO thought it was time to move its headquarters. She connected with a couple of other CEOs who recently moved. Learning from their experiences helped her anticipate issues she had not thought of, ranging from additional marketing expenses to printing new collateral with the updated address to lost employee productivity due to changing schedules as a result of a different commute.
Failing to Plan for Problems is Planning to Fail
If you take away one message from this article, remember that the key to addressing cost overruns is to remember that failing to plan for problems is planning to fail. Use this phrase as your guide to prevent cost overruns and avoid falling prey to the dangerous judgment error of planning fallacy.
Dr. Gleb Tsipursky has over 20 years of experience empowering leaders to avoid business disasters as the CEO of the boutique consulting and training firm Disaster Avoidance Experts. Tsipursky authored The Truth Seeker’s Handbook: A Science-Based Guide, and his Never Go With Your Gut: How Pioneering Leaders Make the Best Decisions and Avoid Business Disasters is forthcoming in November 2019. Featured in over 750 articles and interviews that include Fast Company, CBS News, Time, Scientific American, Psychology Today, Business Insider, and Inc., Tsipursky has a strong research and teaching background in behavioral economics and neuroscience with over 15 years in academia, including 7 years as a professor at the Ohio State University. Connect with him via LinkedIn, Facebook, and Twitter, email him at gleb[at]intentionalinsights[dot]org, and get a free copy of his Assessment on Dangerous Judgment Errors in the Workplace by signing up for his Disaster Avoidance Tips.