Every owner or CEO I know of struggles with this. You’ve invested some capital in a vendor, an employee, some new technology, a new initiative, a new marketing campaign and yet you aren’t getting the kind of results you want—even worse, that investment is holding you back from moving forward—however, you don’t get rid of them/it and move on. Why? Because you’ve already spent the money. Right?
But what you and I often forget to do is to calculate all of the other costs associated with this sunk capital. For example, all of the time we spend thinking about or working on this problem (for ex. an underperforming employee). Or we forget to think about all of the business or revenue we could have received if the right person or vendor or technology was in place.
At the end of the day sunk costs are just that … sunk. For good or bad, our desire to not “lose money” often gets in the way of us making good business decisions. It happens to all of us.
I. My Experience With the Sunk Cost Problem
A few years ago, I decided that my main website needed an update. Wanting to practice what I preach, I decided to outsource the project. And being an obsessive-compulsive :-), I wrote out very clear instructions about what I want my site to look like and accomplish—including colors, fonts and functionality etc.
Unfortunately, after three months, the project still wasn’t complete. The number of hours I’d invested giving feedback—often the exact same feedback—and frequently the same feedback that was in the original document I gave them at the beginning of the project—was unbelievable (okay, embarrassing). Note: This was an outsourcer whom I’d used in the past and who, on their last project, was lightening fast.
Frequently, over the three months of that project I thought, “If I had simply done this project myself, it would have been done two months ago.” But because I had already placed my money in the pre-paid package system with elance (now, UpWork) I kept enduring this problem—that is, until I remembered the sunk cost problem.
One day I was explaining my frustration to one of my closest friends (and showing him some of the feedback I had given them) and he simply said, “So, why don’t you just do it yourself?” As soon as he said that I realized that I had once again fallen prey to the sunk cost problem. Why hadn’t I changed the process months ago (whether it was me or another outsourcer)? Why? Because I had already paid for this solution and I wanted it delivered. Yet who cares? Every moment I spent working on correcting their work was lost time and revenue. In essence, I fell for the the sunk cost problem once again.
II. How About Yours
I remember working for a client years ago. They had purchased and installed a core system that had cost the company a million dollars to install. The problem was, it was a terrible system. They had to spend well over a hundred grand a year on a consultant to fix the on-going problems, everyone hated the system, it hindered customer service, customers hated using it, it slowed operations down, it hindered innovation, etc. It was just terrible. But every time I said, “So, why are you tolerating this? It’s been five years and it’s costing you more per year to keep it than to purchase a new system?”
Yet, every time I raised that question, the answer came back the same, “But it cost us a million dollars. We can’t abandon it.” Even though this group of executives understood the concept of sunk costs, they couldn’t emotionally get passed the million dollar investment (despite the fact that it was costing them more than the purchase price to keep it).
So, as you look at your business, where are you allowing sunk costs to get in the way of your organization’s progress? Is there a vendor you’re still holding on to or an employee you need to let go of? Or is there some technology you purchased in the past that you’re still trying to get your “money’s worth,” yet it’s hindering the productivity of your people or organization? If so, then you probably know what to do. Sunk costs are simply that … sunk. Just make sure they don’t take you down as well!
To your accelerated success!