Project selection and termination--how executives get trapped
Many organizations deal with the challenge of choosing among projects that compete for resources. These choices often involve considering the termination of non-performing projects in favor of new, more promising projects. Terminating a non-performing project is not an easy decision for an organization. The organization has to deal with factors such as the money spent on the project, the image of the company, and the personal aspirations of the decision makers.
Much research has been done on portfolio selection and the factors that affect decision makers when terminating projects.
This paper explores the results from a survey that was done as part of a doctoral thesis to determine the project selection and termination process in organizations; 89 companies from 23 countries across 18 industries took part in this survey.
The results from the survey show support for some of the previous findings, but also show a number of surprising departures from the traditional assumptions about project selection and termination.
Any organization that performs projects aims to deliver its projects successfully. It is, however, not only the successful delivery of projects that is important to businesses: selecting the best projects to spend their hard-earned money on is equally important. The practice of selecting projects in organizations is commonly known as portfolio management.
The process of portfolio management considers both new projects that must be performed by the organization as well as existing projects that must be put on hold or terminated. In general, projects that are terminated are not performing satisfactorily or do not meet the minimum portfolio criteria. This approach was summarized by Rad and Levin:
Portfolio management is a dynamic decision process, whereby a business's list of active new product (and development) projects is constantly updated and revised. In this process, new projects are evaluated, selected, and prioritized; existing projects may be accelerated, killed, or deprioritized; and resources are allocated and reallocated to active projects. (Rad & Levin, 2006, p. 10)
Existing literature suggests that decision makers will resist the termination of a non-performing project and will escalate the commitment of resources to a failing course of action (i.e., a failing project) for a variety of mostly psychological reasons (Brockner et al., 1986; Conlon & Garland, 1993; Garland & Conlon, 1998; Kahneman & Tversky, 1979; Moon et al., 2003; Staw, 1997; Whyte, 1986).
What We Learn From Existing Research
Most of the pioneering work on escalation of commitment (EoC) was done by Professor Barry Staw, and most researchers in this area have based their work on his research (Rice, 2010).
Staw's first research on the topic, “Knee-Deep in the Big Muddy: A Study of Escalating Commitment to a Chosen Course of Action,” was published in 1976 (Staw, 1976). Following this 1976 paper, Staw authored and co-authored a number of papers on EoC (Fox & Staw, 1979; Staw & Ross, 1978, 1980, 1989; Staw, 1981, 1997; Staw & Hoang, 1995). Staw's summary and appraisal in 1997 collected all his ideas and findings from the previous 21 years of research. Following is a brief summary of Staw's 1997 work.
When people have lost something, they are often faced with a choice to pursue some course of action to regain what has been lost or to accept the loss. Very often the decision to withdraw or to continue with a losing course of action is not obvious, and a person may find it difficult to realize or accept that he or she is pursuing a losing course of action. These conditions are called EoC situations and are defined as “situations where losses have been suffered, where there is an opportunity to persist or withdraw, and where the consequences of these actions are uncertain” (Staw, 1997, p. 192).
Staw summarized that humans have a psychological tendency to get caught up in EoC situations, often to their own detriment, that of their organization, and sometimes even their country. He found that EoC often involves compounding losses over time, and that people responsible for prior losses have a tendency to invest more in an escalating situation than people who have not been involved in the prior decisions. This is, however, not always the case, and Northcraft and Wolf (1984) showed that EoC is less of a problem when clear-cut financial information is available to the decision maker.
Staw argued that escalation behavior is affected by multidetermination: a combination of economic and psychological behaviors. Decisions are seldom made in isolation, and the influence of the environment (structural and contextual forces) must be considered.
Staw proposed a model (Staw & Ross, 1989) that represents the aggregate effect of EoC, as shown in Exhibit 1.
Staw proposed a classification scheme with five determinants:
- Project determinants—Project-related factors are the most obvious causes for EoC and persistence with chosen courses of action. Decision makers will consider these factors when evaluating the usefulness of further investments/actions in turning a losing situation around. Staw proposed the following factors that could lead to persistence on a project: temporary vs. permanent losses, the efficacy of further investments/actions in turning a losing situation around, the size of the project's goal or eventual payoff, availability of feasible alternatives to a course of action, and the salvage value or closing costs for ending a project.
- Psychological determinants—Staw's research showed that people often do not turn away when they realize that their investment is not performing the way they expected and that it is unlikely that they will reap the anticipated benefits. Staw proposed four specific determinants (i.e., optimism and illusions of control, self-justification, framing effects, and sunk cost effects).
- Social determinants—Social determinants are external to the decision maker, and Staw proposed two determinants (i.e., external justification and binding and leadership norms).
- Organizational determinants—Organizational determinants are macro-level variables that could play a role in EoC. These determinants relate to the way in which an organization establishes organizational policies and procedures to govern its decision-making. These factors are not specifically related to individuals in the organization but rather to the system of the organization.
- Contextual determinants—Contextual determinants are forces that are greater than the organization itself, such as government intervention. Governments bailing out companies that are of national interest are an example of a contextual determinant that could hold an organization to a failing course of action.
This paper specifically investigates project management and psychological determinants.
Project Management Research
Projects have been performed for thousands of years. Significant projects were conducted in Europe (notably the building of churches), which were managed, to the best of our present knowledge, in a fairly informal manner (Cleland & Ireland, 2002). Formal project management is a relatively young field of study and evolved from systems management during the 1940s and 1950s. The U.S. Department of Defense was instrumental in the development and implementation of formal project management methods (Kerzner, 2009).
Modern project management can be categorized into three areas: project management, program management, and portfolio management (PMI, 2008).
Portfolio management is of specific interest in this study because it concerns itself with the identification, prioritization, authorization, management, and control of projects and programs (Archer & Ghasemzadeh, 1999; Morris & Jamieson, 2004; Turner, 1999). It is in the management of project portfolios where the decision to escalate commitment presents itself.
Managing Portfolios of Projects
Project portfolio management takes a holistic view of the organization; it is here where the strategy of the organization is translated into projects. It is also here where projects that are not strategically viable or not performing well are discussed, assessed, and terminated.
The management of investment portfolios was first formally described by Markowitz (1952). Even though portfolios of projects are different from the traditional investment portfolios (Morris & Jamieson, 2004), both share the attribute that organizations want to select the portfolio that will be in the best interest of the organization, and Jonas (2010) specifically researched the role of the project portfolio manager who facilitates the collection and structuring of information to enable decision-making.
The main elements of project portfolio management are described by various authors at differing levels of detail (Archer & Ghasemzadeh, 1999; Filippov, Mooi, & van der Weg, 2010; Ghasemzadeh, Archer, & Iyogun, 1999; Jonas, 2010; Levine, 2005; Morris & Jamieson, 2004; Morris & Pinto, 2004; Pennypacker & Retna, 2009; PMI, 2008; Rad & Levin, 2006; Turner, 1999). All these authors proposed processes that describe the methods followed by organizations to define, evaluate, and select their portfolios of projects. Archer and Ghasemzadeh (1999) gave the most graphical description of such a process and furthermore recognized the importance of decision-making processes:
Decision makers should be provided with interactive mechanisms for controlling and overriding portfolio selections generated by any algorithms or models, and they should also receive feedback on the consequences of such changes [and]
Project portfolio selection must be adaptable to group decision support environments (Archer & Ghasemzadeh, 1999, p. 211).
Exhibit 2 shows the main aspects of portfolio management, derived mostly from Archer and Ghasemzadeh, but also adds ideas from other authors. The solid lines in Exhibit 2 show the flow of information in the selection of projects; the dashed lines show how information is fed back from the project execution processes.
The process starts with the organization's business strategy, which would typically include the vision, mission, and strategic objectives. The strategic objectives determine the opportunities that the organization wants to pursue or the threats that must be avoided. Opportunities and threats can be translated into actions in the form of projects (Archer & Ghasemzadeh, 1999; Morris & Jamieson, 2004; Turner, 1999). Selection criteria are used to score each project. Once a potential project is identified, an analysis is done to determine its feasibility, usually in the form of a business case (Kerzner, 2009; Martinsuo & Lehtonen, 2007; Moore, 2010; Pennypacker & Retna, 2009).
Once the business case is completed, the project is scored against the selection criteria. But projects are not selected only on the basis of their score against the criteria. During portfolio balancing, a number of additional factors are considered, most notably the availability of resources to perform the project. The portfolio balancing process also compares newly proposed projects to projects that are already in progress. It is during the portfolio balancing process that the organization would typically decide to terminate a project based on its performance or in favor of another project (Archer & Ghasemzadeh, 2004; Pennypacker & Retna, 2009; PMI, 2008). After project selection, projects are initiated and execution starts. Performance information from the project execution process is fed back into the portfolio management process (Archer & Ghasemzadeh, 1999; PMI, 2008).
This model is idealistic and very few organizations would follow it exactly as it is as presented here. The model does, however, contain all the processes relevant to decisions about projects in the organization. It should further be noted that the steps in the process could be formal or informal, performed rigorously or ad hoc, well documented or done as a result of the experience of business owners (Archer & Ghasemzadeh, 2004).
The definition of project success is often a topic of debate in organizations. Cooke-Davies (2001) defined 12 factors that affect the success of a project. In a later contribution, Cooke-Davies defined three views of project success (Cooke-Davies, 2004).
The first is the successful delivery of the project as far as its budget, schedule, and quality are concerned (i.e., was the project done right?) (Pinto & Slevin, 1988). This definition does, however, imply that a project that holds no value for the organization could be delivered successfully, which is sometimes the case (Shenhar, Dvir, Levy, & Maltz, 2001; Turner, 1999).
The second view of project success is that of benefits realization (Pinto & Slevin, 1988). This is the view that executives would have of a project, since it supports the organization's strategic objectives (i.e., was the right project done?). This definition does, however, imply that a project could be delivered over budget, late, and with less than the desired quality and still deliver value to the organization.
The third view is whether the right projects were consistently done right.
Baccarini (1999) offered an alternative approach using the Logical Framework Method, but arrives at the same conclusion, which highlights the difference between project and product success. When executives consider project success, there is clearly a tradeoff between the success of the project and that of the delivered product.
A number of theories are proposed as psychological determinants for EoC. These determinants create a psychological effect on the decision maker to escalate commitment. The determinants proposed by Staw (1997) are expanded to include determinants suggested by other researchers.
The following five determinants have been directly attributed to EoC by various researchers:
- Sunk-cost effect
- Project completion hypothesis
- Optimism and illusion of control
Sunk cost has been described by many authors as either the primary reason for EoC or as a significant contributor. Sunk cost in the context of projects is defined as “a cost that has already been incurred and which should not be considered in making a new investment decision” (Amos, 2007, p. A. 11).
Arkes and Blumer (1985) presented a number of experiments to show the propensity of subjects to favor investments with a high sunk cost (money, time, or effort) compared to investments with a lower sunk cost. Arkes and Blumer conclude that sunk cost should not influence the current position of the decision maker; however, most people would favor investing more money in an investment with a large sunk cost as opposed to an investment with a lower sunk cost. Garland (1990) specifically addressed the willingness of a decision maker to continue investing in a project with varying amounts of sunk cost and at various stages of completion of the project. When plotted, the results clearly show that the probability to authorize the remaining budget increases linearly with the increase in the sunk-cost percentage.
Staw (1976) investigated the effect of personal responsibility on EoC in situations in which a decision maker had a choice between alternatives and has, at a later stage, the opportunity to make further decisions to influence the situation (i.e., the decision maker can allocate additional resources or withhold such resources). He argued that a decision maker may, instead of changing his or her behavior, cognitively distort the negative consequences of a prior decision to make it appear to be a rational and favorable decision. This stems from the reluctance of the decision maker to admit prior mistakes or in order to reaffirm a previous action.
In an extensive analysis of prior research results of EoC prior to 1992, Brockner (1992) concluded that self-justification is the primary reason for EoC.
Project Completion Hypothesis
Conlon and Garland (1993) proposed that project completion and sunk cost are cofounded and that prior research may have overemphasized the effect of sunk cost as a reason for EoC. Later research by Garland, Conlon, and Rogers (1990) showed that the opposite of sunk-cost effect may occur (i.e., less is invested as the incremental cost of the project increase). A decision maker would usually be aware of the time progress of the project when decisions are made and the approaching end of the project. The approaching end of the project could entrap the decision maker and may lead to goal substitution, whereby decision makers shift their focus from the goal the project was to achieve in terms of its deliverables to the goal of just completing the project (Kahneman & Tversky, 1979).
Conlon and Garland (Conlon & Garland, 1993; Garland & Conlon, 1998) did not completely exclude the possibility that sunk cost plays a role in some of the decisions to escalate.
Optimism and Illusion of Control
Humans have a tendency to be more optimistic when faced with negative situations. Our tendency to be overly positive when we evaluate ourselves and overstate our own ability to master or control situations appears to be part of our normal thought processes (Taylor & Brown, 1988, 1994). This behavior can reach extreme proportions when people who have thoughts about an event before it occurs think that they caused the event, even if such influence appears magical (Pronin, Wegner, McCarthy, & Rodriguez, 2006).
The effect of this behavior on projects is that a decision maker may select a project based on an overestimation of the value that the project will add to the organization (Bazerman & Samuelson, 1983).
Entrapment, as described by Rubin and Brockner (1975), shares many characteristics with EoC. Brockner et al. (1982) researched the effect of timing on entrapment situations. Their research suggested that economic factors have a greater influence on the behavior of a decision maker in the initial stages of a project. In contrast to this, face-saving variables have a greater influence later in the project.
Decision-making models are the building blocks of the theories that describe how and why EoC takes place. These models, or theories, describe the psychological decision-making process that takes place when a decision maker decides to escalate commitment. Some authors pit these theories against the more direct determinants; for example, Brockner (1992) argued for self-justification against prospect theory, and Keil (2000) considered self-justification theory, prospect theory, agency theory, and approach avoidance theory as mutually exclusive options. The following decision-making models are used or considered in the context of EoC in the studied research:
- Decision theory
- Expected utility theory
- Probability theory
- Prospect theory
- Decision framing
- Agency theory
- Group decision making
Research Review Summary
There exists a substantial amount of literature dealing with EoC and project management, but hardly any research has been done on EoC in the context of the selection of projects in portfolios. A number of possible EoC determinants have been identified, but there appears to be confusion about EoC determinants and decision-making theories. In addition to this, there is no research that specifically considers the combined effect of the proposed determinants.
In the light of this background information, the author proposed the use of a computer simulation game to test the various determinants in a controlled experimental environment. In order to develop a realistic simulation game, the author had to understand how real organizations deal with portfolio selection and project termination.
To this extent a survey was developed to collect portfolio management information from organizations; 89 organizations from 23 countries across 18 industries took part in the survey, which was conducted in March and April, 2012.
Portfolio Selection Survey
The purpose of the survey was to determine the following:
- How is the portfolio decision-making authority structured in the organization?
- How does the portfolio selection process work for projects?
- Under what conditions will a project be terminated prematurely?
- What are the reasons for an organization not terminating a project or projects that are in trouble?
There were a total of 20 primary questions and 8 conditional questions. The questions were divided into three sets:
Set A – Structure and process of project selection (5 questions + 5 conditional questions)
Set B – Conditions and reasons for project termination (5 questions + 3 conditional questions)
Set C – Demographic information (10 questions)
Question set B also tested the factors listed in previous research and is important to confirming domain of this research. A participant could answer a maximum of 28 questions and a minimum of 19 questions.
The target population for this survey was managers in organizations who are responsible for the portfolio management process.
The survey was sent to named individuals in organizations. An e-mail with the author's cover letter and an authorization letter from SKEMA Business School was sent to each individual to request their participation. When a positive response was received, the hyperlink to the online survey was sent to the participant.
A pilot survey was done to test the relevancy of the questions with individuals who are experienced project managers. The target population for the pilot was not the same as that of the final survey. Each person in the pilot team was asked to evaluate the survey in terms of the following:
- Clarity of the question
- Relevance of the question in terms of your organization or your experience
- Relevance of the possible answers to the question
Following are the results from the survey:
Who selects the projects in the organization? (n = 89)
If there are business units, do the projects selected in business units require executive approval? (n = 38)
If there are business units, how is the budget allocated for business unit projects? (n = 38)
Does the budget determine the selected projects, or do the projects determine the budget? (n = 89)
Does the organization have a formal process to choose between competing projects? (n = 89)
Does the organization maintain a register of all its projects? (n = 89)
Where there is a register of projects, how often does the organization review its portfolio of projects? (n = 76)
Does the organization use a predefined set of scoring criteria for selecting projects? (n = 89)
If there are predefined criteria, what are the criteria for project selection? (n = 48)
Is the portfolio selected based on the score of each project against the criteria? (n = 48)
Does a forum exist where project termination is considered? (n = 89)
Does your organization terminate projects that are failing? (n = 89)
What are the most important reasons for project termination, ordered from A to E? (n = 76)
Do projects sometimes receive funding over and above what was budgeted in an attempt to salvage the project? (n = 89)
Could a single individual influence or veto the decision to terminate a project in your organization? (n = 89)
To what extent do the following factors affect the decision NOT to terminate a project? (n = 89)
Support for Psychological Determinants
The following question was posed to respondents to test support for the psychological determinants:
Your organization is performing 4 similar projects. At a project review it comes to light that it is unlikely that any of the projects will deliver on their business benefits.
Which two projects are most likely to be cancelled by your organization?
P1: 25% complete, money spent is $3 million of a planned $10 million
P2: 25% complete, money spent is $7 million of a planned $10 million
P3: 75% complete, money spent is $3 million of a planned $10 million
P4: 75% complete, money spent is $7 million of a planned $10 million
Among the respondents, 33% selected P1 and P2, 13% selected P1 and P3, 0% selected P2 and P4, 1.4% selected P2 and P3, 4.2% selected P2 and P4, and 2.8% selected P3 and P4. Also, 19.4% said that all the projects will be cancelled, 5.6% said that no projects will be cancelled, and 20.8% were uncertain of the outcome.
Considering only the respondents who selected a pair of projects to be cancelled, very strong support was shown for cancelling projects that have just started (25% complete), despite the money spent. This shows stronger support for the project completion hypothesis than for sunk cost.
From the data collected in this survey we can construct the following model of a typical organization:
Projects in the organization are selected by a central committee of decision makers. This also applies to organizations where business units have separate portfolios, but executive approval of projects is still required. The allocation of funds for projects in business units is done at the corporate level.
The budget made available for projects is primarily based on the projects that organization wants to perform; that is, there is not a fixed annual budget for projects.
A central register of projects is maintained and the organization has a formal process for selecting projects. The selection of projects is based on a predefined set of scoring criteria. The most important criteria are exposure to business risk, return on investment, and statutory requirements. The result of project scoring is not the only input to project selection and the availability of resources to perform projects is a major contributor.
The portfolio of projects is reviewed on a monthly basis.
A forum exists where non-performing projects are evaluated. This forum will terminate a non-performing project if it becomes clear that the project will not give the envisaged business benefits, or has a significant cost or time overrun. Projects that have just started are more likely to be stopped than projects that have progressed quite far.
The organization will, however, first allocate additional budget to a failing project in an attempt to salvage it. The CEO of the organization does have a veto right to stop a project or to prevent it from being stopped.
Political agendas have the strongest influence on decisions to continue with a failing project. Sunk cost, cultural factors, and internal competition also influence the decision to continue with failing projects.
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© 2012, Werner G. Meyer
Originally published as a part of 2012 PMI Global Congress Proceedings – Vancouver, Canada