September
26,
2024
Why is a project over budget and years-delayed still going?
Imagine it’s movie night. You drive to the movie theater, choose a movie, pay for your ticket and buy popcorn and soda. The movie starts but, forty minutes in, you’re pretty sure you don’t like it. What do you do? Most likely, you’ll continue watching.
Humans will continue with something we have already invested in — whether that investment is time, effort, or money — even faced with evidence that it is no longer the best option. It’s called the “sunk cost fallacy;” people stick with a course of action because they have invested in it, even when it’s clear that abandonment yields more benefit.
As the pace of decision-making increases, due to industry and economic shifts, sunk costs plague the corporate world.
Why is the sunk cost fallacy so damaging?
Do you remember this major business blunder?
Blockbuster considered buying Netflix but decided to double down on investing in physical rental stores when digital streaming started.
Blockbuster highlights how commitment to bad decisions can escalate to a failure of fundamental strategic goals. Ultimately, their loss of money, time, and effort were not survivable.
Even when failed initiatives don’t scuttle the company, they can do a lot of damage: weakened market position, opportunity costs, resistance to change, turnover, and demotivated employees.
How do we get stuck in these projects?
The core problem is that, for whatever reason, organizations fail to acknowledge that whatever time, effort, or money has spent to date is unrecoverable — hoping that additional resources poured into the project might yield the desired financial results. But how does that happen?
Bad planning underpins many failed projects. How can you meet ROI if you don’t know the “I”? Once optimistic budgets are blown or unrealistic milestones are passed, the project is adrift. Often, project leaders just nudge budgets and schedules, hoping to minimize the magnitude of the failure, rather than starting over with a fresh eyes and lessons learned.
Bad planning underpins many failed projects.
Personal involvement of leaders in projects is a double-edged sword. We need leaders to wholeheartedly sponsor important initiatives if they are to succeed. However, this personal connection makes it hard to admit that a pet project is headed for failure, and even harder to pull the plug on it.
Company culture often sets the stage for sunk cost mistakes. Some organizations punish failure by withholding bonuses, delaying promotions, or firing employees attached to failed projects. Also, managers are not trained in how to handle failure. They might become stuck on a project that is not fulfilling rather than raising concerns or stopping the project.
Company culture often sets the stage for sunk cost mistakes.
On the other hand, even if a project succeeds, employees might only receive a pat on the back or public acknowledgment. This creates an expectation that everything should turn out as planned, regardless of reality.
What organizational strengths protect against sunk cost fallacy?
- Promote a growth mindset where learning from failures is valued and celebrated. Have open discussions on what went wrong and how to improve. Lead by example by acknowledging the “win” of not escalating commitments.
- Teach employees and management to fail fast and fail smart. This means a hypothesis and realistic action plan implemented, executed, and measured with built-in decision points based on agreed-upon metrics that allow the project to continue or change course. Make sure that project successes and failures are not confused with a individual’s successes or failures.
- Push decision-making to the doers. They’re the ones closest to the effort, resources needed, and realistic timelines. If a higher-up champions the project (so there is an emotional attachment to its completion), build in “reality checks” constructed by team members on the ground.
- Follow the data. At go/no-go checkpoints, compare data-informed scenarios: continuing the project, stopping the project, and an alternative. Designate people to bring dissenting opinions and identify potential flaws and pitfalls. Make the decision based on pre-determined factors, like costs, benefits, and alignment with strategy.
Here’s how it should work.
Our client needed a new company portal. After determining guiding principles, MVP, and functional needs, they chose a vendor. But, well into the project, they conducted a review; they realized the selected vendor could not deliver the functionality they needed, and the partnership was fragile.
Rather than continuing with a subpar product, our client decided to cut their losses. It wasn’t an easy decision; a lot of time, money, and effort had already gone into the initiative. But they revisited their guiding principles and decided they could not be tied to a vendor that couldn’t meet their needs. Further, they realized that relying on a single vendor may not be the best approach.
We celebrate the courage and wisdom it took to make that decision. Hopefully, more organizations can align their strategy, culture, and practices to save themselves from hopeless initiatives.
