A Project Dilemma at Canadian Shield Insurance
(11 pages of text)
In market-leading firms, software development is often undertaken by in-house teams to address specific information systems (IS) needs — in part because nothing that fits specific needs is commercially available. These projects often end up taking longer than planned and exceeding ever-growing budgets.
In this case, in-house software development of an information system for Canadian Shield Insurance was finally nearing completion (over budget and behind schedule), and the beta-testing phase and some initial training sessions had begun. Not all the first impressions were positive, so when the director became aware of a recently introduced commercial offering that seemed like a very attractive alternative, he faced a dilemma: should he abandon the developed project, which amounted to five years of work and over $1 million, for a different system that might be a better option? The protagonist in the case had done a preliminary functional comparison of the in-house information system and the commercial offering, and he recognized that the new alternative might hold some significant advantages for the firm. The potential negative implications for his career and the careers of the people he worked alongside during the development project caused him to think about whether or not he should be informing others within the firm about the commercial alternative and, if he did, what position he should take.
Students will discuss the following ideas:
- In-house development of an IS commonly exceeds budgets and schedules, often by as much as 200 per cent. Decision makers should recognize this when deciding on what contingencies to consider when laying out both budgets and schedules.
- IS choices should not be made in isolation from a firm’s needs, other market offerings, or the effect on loyal employees.
- As economic and game theory teaches us, “sunk costs” should never be considered when making future investment decisions. This case is an example of where “sunk costs” are bound to be part of the decision, as they are related to the training and emotional investment of the protagonist and his group of colleagues who have championed the development of the internal system over the last five years. To ignore these “sunk costs” completely in this scenario has the potential to be damaging to the firm in the long run (reduced loyalty among other employees, loss of internal expertise, etc.).
- Tradeoff analysis can combine important uncertainties — some reliable estimates and some not-so-hard estimates.
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