On time, on budget

Why does a task always seem to take longer than you think it should? It doesn’t matter if it some DIY at home or the implementation of a new IT system at work, it takes longer than everyone expected. Procurement projects, whether that’s getting a purchase order approved or sourcing a new product, often suffer the same fate.

The planning fallacy, first proposed by Daniel Kahneman and Amos Tversky in 1979, is a phenomenon in which predictions about how much time will be needed to complete a future task are under-estimated. The planning fallacy is one of the most common and consistently demonstrated cognitive biases.

In the fifth in the series of blogs about change management in procurement, I consider the planning fallacy, why it occurs and what we can do about it.

There are 3 reasons for the planning fallacy: optimism bias, coordination neglect and procrastination.

  • Optimism bias is a cognitive bias that causes someone to believe that they themselves are less likely to experience a negative event. It is also known as unrealistic optimism or comparative optimism. Examples include buyers who think they are less exposed to price increases and project managers who think they are less inclined to go over-budget.
  • Coordination neglect exists when organisations divide a task and then fail to integrate it effectively. This is as a result of many factors including inadequate communication (lack of a common language and lack of perspective taking), partition focus (an emphasis on dividing a task and to do this quickly which results in inadequate planning) and component focus (people focus on a particular task and have narrow functional specialties).
  • Finally, procrastination arises do a lack of impulse control, that is, we do what is more instantly gratifying. Unfortunately, the digital communication revolution and the way it is designed to distract us make procrastination more likely.

So how can we avoiding or minimise the planning fallacy? There are 3 ways:

  • The first step is to recognise that the planning fallacy exists. When a new project is presented that requires procurement input, we should recognise that the presenter has probably under estimated the cost and overestimated the benefits. This is called strategic misrepresentation. All though this may sound like we are calling the presenter a liar it is common among all presenters of new projects so the only way they can get their project noticed is by following everyone else. To avoid any mudslinging, it is advisable to have a record of previous projects so that we can see the level of strategic misrepresentation in the past. The UK government have a green book which contains data about public projects and have found that they are typically 40% over budget. Now I must be clear, I’m not saying that we should give contractors 40% more money. We must draft contracts that incentivise contractors to meet the original target and construct liquidated damages that enable us to claw back a representative proportion of the over-spend.
  • More time should be given to effective planning. Procurement have a key part to play here by ensuring that sufficient time is allowed to develop the scope of work, conduct the negotiations and finalise the contract.
  • Finally, more resources should be given to communication across the team. Again, procurement have a key role. Procurement can help with translation, for example, where engineers can’t talk with marketers and where suppliers can’t talk to cost centre managers.

The planning fallacy is real but we are not helpless. No one wants to tell the boss that it’s going to cost more and take longer but she’s going to find out eventually. It’s better to be the trusted advisor that is proved to be right that someone who’s seen to be part of the problem.

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