Blogs

Only one type of animal ‘honors’ sunk costs: humans.

Our sunk costs take myriad forms. An investor loses everything because he refuses to sell his holdings despite signs of a recession. A couple stays together long after realizing it won’t work out.

In the case of financial systems, sunk costs usually have three dimensions: financial, psychological, and technical. We will examine each dimension before suggesting several traits that can help you free your organization.

Consider the following scenarios:

1. Financial Debt

Your organization spent an inordinate sum on licensing, training for, and implementing a new financial system. Now suppose that the system proves to be a disappointment. Users and executives might be willing to acknowledge the mistake, even to correct it. But in most cases, no level of dissatisfaction will overcome the sheer magnitude of a colossal investment.

2. Psychological Debt

Several key executives in your company wagered their reputations on the just-completed software project. Contracts permitting, your organization has the resources to begin a new search. However, nobody is willing to risk their reputations undoing the financial software rollout until the pain-points become too glaring to ignore.

3. Technical Debt

In order to make an unwieldy finance application work, your organization has invested untold hours and resources in customization, training, and auxiliary solutions. Workarounds become more hardened and inflexible over time. Eventually, the costs of maintaining the status quo outweigh the price-tags of change.

So how can you keep sunk costs from warping your decision-making?

Three key traits will help you avoid them:

A. Understanding

The sunk cost “fallacy” isn’t really a fallacy. It’s a psychological tendency; in other words, it has as much power as you give it. So be keenly aware. Think through your past choices, noting the situations in which a false sense of commitment warped your final decision. Identify when and where your team is uniquely vulnerable to sunk costs.

B. Thoroughness

Choose right the first time. This might be the most important step in avoiding false commitments. Every high-budget project will involve opportunity costs. Spend as much time and effort in the search process as you need.

C. The right culture

The sunk cost fallacy thrives on the fear of failure. This is true both on an individual and a group level. If your selection process ended in a costly, burdensome financial application, then your team needs both the courage and the permission to start over.

Google provides an example of this with its ‘moonshot’ company, simply named X. X is tasked with solving the biggest, most complex problems on earth—a goal they approach from a unique vantage point. According to its head, X treats failure as a valuable mechanism, granting bonuses not just to teams that complete projects but also to teams that end failing ones. The result is a decision-making culture immune to sunk costs.

***

Xledger equips tens of thousands of customers in 60+ countries with the market’s most automated finance management solution. We treat every customer like our only customer, pairing market-leading functionality with radical service. Our personalized customer support has earned us an industry-best 98% customer retention rate. That’s lifetime, not year-over-year—we have retained 98% of all customers since our founding. Our recommending network include PwC, and BDO. For more information about Xledger and how we can serve you, please get in touch.