Published here October 2003.

Abstract | Introduction | Reason 1 | Status Quo Bias
Sunk Cost Bias | Supporting Evidence Bias | Framing Bias
Estimating and Forecasting Biases | Garbage In, Garbage Out  | PART II


If you've attended recent business conferences, you may have heard business leaders and management consultants speak of the "60% solution." The phrase refers to the belief that organizations obtain only about 60% of the value that could be derived from their businesses. The remaining 40% of available value is lost, reportedly, due to errors in decision-making and weaknesses in business systems.

I believe 60% is an accurate characterization of the way most organizations select and manage their project portfolios. As will be shown later in this paper, it is possible to compare, using models, the value generated by an organization's current set of project choices with the value that would be generated under a value-maximizing set of choices. My comparisons (similar results have been obtained by others) show that organizations can, in each budget cycle, typically increase value by 20-40% without increasing costs, or decrease costs by 20-40% without decreasing value, by making better choices.

Yes, 40% is BIG, and you may not be immediately convinced by results based on models. Therefore, this paper offers further evidence by explaining the 5 major reasons that organizations mismanage their project portfolios. In this part, Part 1, I describe the first reason that organizations choose the wrong projects, errors and biases in judgment. Subsequent parts of this paper will describe the other reasons for poor project choices: failure to see the forest for the trees, lack of the right metrics, inattention to risk, and inability to find the efficient frontier. As you will see, each of these reasons can by itself cause significant errors.

It should not be surprising that the combined effect could be a 40% loss of value. As you read about the 5 reasons, consider the degree to which each is a factor in your organization. Understanding organizational dysfunctions is useful even if your intention is not to invest in a state-of-the-art priority system. By taking steps to mitigate the problems that affect your organization, you may be able to reduce costs while obtaining more value from your projects. Given the importance of project decisions, obtaining even small improvements will be worth the effort.

Abstract  Abstract

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