Top 3 Biggest Reasons Why You Overspend on Software Development

Top 3 Biggest Reasons Why You Overspend on Software Development

Hiring a custom software developer can be an expensive proposition, especially considering the amount of IT projects that run over budget. Despite all of its advances, the industry is still plagued by its most famous failures, with new articles published every month that cite the alarming rates of late deliveries and unmet expectations.

It’s difficult to have a conversation about custom software development projects without hearing someone mention the ‘black swans’, the rogue waves of the software development world that have threatened to sink even the strongest international brands.

The cases most often discussed include the Lidl project failure of 2018, where 500 million Euros were lost to a failed SAP system, and the time Levi Strauss incurred a 200 million dollar loss when its new financial reporting system went past the delivery deadline.

In the same category, candy maker Hershey endured a 19 percent drop in quarterly profits and an 8 percent decline in stock price because of an overdue ERP system, and the US retailer Kmart floundered and was forced to declare bankruptcy after a warehouse management system had to be written off.

And, it’s not just billion dollar companies. Small to medium-sized businesses can also fall victim to the same scenarios, investing in custom software engineering projects that were supposed to unlock greater opportunities, only to lose that investment at a critical time.

In 2011, the Havard Business Review conducted research into the prevalence of failed software development projects and their associated costs, summarizing their findings as follows:



When we broke down the projects’ cost overruns, what we found surprised us. The average overrun was 27%—but that figure masks a far more alarming one. Graphing the projects’ budget overruns reveals a “fat tail”—a large number of gigantic overages. Fully one in six of the projects we studied was a black swan, with a cost overrun of 200%, on average, and a schedule overrun of almost 70%. This highlights the true pitfall of IT change initiatives: It’s not that they’re particularly prone to high-cost overruns on average, as management consultants and academic studies have previously suggested. It’s that an unusually large proportion of them incur massive overages—that is, there are a disproportionate number of black swans.


So, how can you prevent your project from running into black swan territory? How can you protect yourself and your business from the worst-case scenario? Here are the top three reasons why custom development projects run over budget, and the ways you can stop them before the first line of code is written.


The Vision Is Incomplete

Have you defined exactly what you need, what the benefit to your business will be, and how much you are willing to invest in the solution you want? Bringing in consultants, or software teams, before you have a clear picture of the features you need and what those specific items will do for you (how much money will be saved, or how much value will be added, or how many mistakes will be avoided) is a recipe for cost overruns. Using Endpoint Modeling, we can ensure that the proposed application or system includes all of the specifications required to complete the project within your budget.


The Business Isn’t Ready

In the case of Lidl, significant overruns arose when the grocery giant’s management refused to implement standard accounting norms, preferring to force customization instead. Are you willing to modernize your business processes along with your software project? What will that cost and what is the best, most efficient way to implement those changes? Endpoint Modeling provides a valuable check during this process, as it guides participants through the logical steps required to implement new software, encouraging discussion among all stakeholders to root out unforeseen obstacles and challenges.

Starting a custom software project without first making sure that your business and all of the project stakeholders can realistically make the change you are asking them to make will put automatically put your vision into black swan territory.


The Unknown Knows

As Secretary of Defense Ronald Rumsfeld once famously said, “… as we know, there are known knows; there are things we know we know. We also know there are known unknowns; that is to say, we know there are some things we do not know.” While the statement wasn’t received well at the time, the former Secretary of Defense managed to capture the idea of a black swan. Custom software development projects need to be properly scoped before coding begins to prevent cost overruns, and this is where most consultants and developers fail. Going back to the example of Lidl, the consultants involved in the project did not identify the accounting issue as a problem, which set the new system up for failure.

The Endpoint Modeling process includes a comprehensive feasibility study where every detail is checked for potential problems before work begins. This results of this study are supported by a full cost guarantee so that our customers never have to worry about the known unknowns or the unknown unknowns. Everything is known, and everything is guaranteed. This is the approach that has earned us a 100% delivery satisfaction rating, and we’re proud to offer it to all of our clients.

Do you have a black swan experience of your own? Have you seen projects go significantly over budget? If so, what are the factors that you identified as major culprits? Leave us your story in the comments, and feel free to contact us for a consultation on your next big software project!

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