Consider this scenario: You are the CIO of a medium-sized company with hundreds of employees. You’ve been tasked to modernize the company’s technology portfolio. You ask your senior managers to provide recommendations as to where the company should invest its technology budget. After some time, you hear a lot of well-thought out proposals and make an educated decision based on the information you have at the time. Let’s say you choose Technology A.
Fast forward five years and millions of dollars in investment.
The technology space has seen massive growth and the direction of the company has drastically changed from five years ago. You soon come to the realization that Technology A is no longer an efficient way to solve the company’s technical challenges. Rather than switch courses to a more efficient technology, i.e. Technology B, you plow ahead using inefficient Technology A because you’ve already sunk so much money into it that you feel you need to continue down the path that you chose five years ago.
This example illustrates the sunk cost fallacy and is commonly seen in technology industries.
What is the sunk cost fallacy?
It’s the idea that a commitment to an idea requires performance despite extra costs that arise. A simpler example might be when you spend $10 on an extraordinarily large sandwich and feel like you have to eat the entire sandwich so that you maximize what you paid for. Or, say you are waiting for a late bus and decide to keep waiting only because you’ve already waited for 30 minutes.
We’ve seen this issue throughout our careers. Huge companies become virtually paralyzed because their systems are ancient and fragile, yet they are resistant to change because of the massive investments they’ve made over the years.
Most recently, we’ve seen it with cloud computing. Companies who stand to gain considerable efficiencies and cost savings from moving their on-premise infrastructure to the cloud fail to do so because they have an emotional connection to their past decisions.
Why is the sunk cost trap bad?
The sunk cost trap exposes biases you might have towards remaining in a situation or with a technology purely because you’ve already made investments into it.
For some, these biases result in poor decision-making. Where logic would have you going in a different direction, you remain steadfast with your previous decisions because your emotions are telling you to protect your investment at all costs.
Persistence is often considered a valuable leadership quality. No one likes a quitter, as they say. However, if you ignore all the advice and evidence to the contrary and continue to throw good money after bad, how is that valuable leadership? In a fast-changing technology landscape, perhaps perseverance is not as good of a quality as we thought. Perhaps a good leader is one that knows when to cut losses and forge ahead in a different direction. Perhaps company cultures should be better at rewarding the admitting of mistakes over persistence with a clearly bad direction.
Why do people succumb to the sunk cost trap?
There are a variety of reasons, most of which are based on emotional connections with our past decisions. People who fall into the sunk cost trap believe that:
- Past investments need not affect future investments.
- Grit and tenacity are more important than common sense.
- Our luck will change if we stick with our commitments.
- Our past decisions were not wrong because we are too proud to admit it.
- Letting go of something we currently have is generally uncomfortable, despite there being better alternative that is readily available.
With respect to technology, the principle of sunk costs isn’t about building a company’s technology infrastructure without commitment or follow-through. There are decisions or commitments we may not feel like making today but that we know, deep down, are the right things to do for the wellbeing of a company.
But rather, it’s about spotting patterns in honoring sunk costs and making better decisions in the future. Clearing the sunk cost “baggage” (technical and otherwise) from the decision-making process will make room for technical progress and agility. Sometimes walking away is the wisest decision one can make.
How do I avoid the sunk cost trap?
The most important thing you can do is recognize that any investment you’ve made into a technology to date, financial or otherwise, should not be a part of the decision making process. You should be open to realizing a loss, if necessary, and make your decisions based on future costs and benefits.
One area where we see the sunk cost trap in action is in companies resisting migration of their on-premise data to the cloud. The benefits of moving an on-premise infrastructure to the cloud are well-documented, yet many companies resist a cloud migration because of their past investments in on-premise solutions. These benefits include:
- Increased access to computing power
- Decreased application design complexity
- Lower costs
- Faster time to market
- Improved disaster recovery
If you’re still dealing with an on-premise structure and are holding back on pulling the trigger on a cloud migration, consider that you might be rationalizing your hesitation on illogical emotional connection to past decisions and are continuing to invest in a technology that is perhaps no longer well-suited for your business.
Cloud Forward Thinking
Simply put, cloud computing is computing based on the internet. Where in the past, people would run applications or programs from software downloaded on a physical computer or server in their building, cloud computing allows people access to the same kinds of applications through the internet.
When you update your Facebook status, you’re using cloud computing. Checking your bank balance on your phone? You’re in the cloud again. Chances are you rely on cloud computing to solve the challenges faced by small businesses, whether you’re firing off emails on the move or using a bunch of apps to help you manage your workload.
In short, cloud is fast becoming the new normal. By the end of 2025, it’s estimated that 80% of all IT budgets will be committed to cloud apps and solutions.
Why are so many businesses moving to the cloud? It’s because cloud computing increases efficiency, helps improve cash flow and offers many more benefits. Here at Great Data Minds we believe wholly in cloud-based solutions.
::Originally published at https://skylarq.com/blog/cloud-sunk-cost-trap/:::