You’re likely familiar with the concept. Put simply, a sunk cost is a past expense that unduly influences your decision-making—now and in the future.
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 ERP 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.
1. Financial Debt
Consider the following scenario.
Your organization spent an inordinate sum on licensing, training for, and implementing a new ERP 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
Now extend the scenario above.
Several key executives in your company wagered their reputations on the just-completed ERP project. Contracts permitting, your organization has the resources to begin a new search. However, nobody is willing to risk their reputations undoing the ERP rollout until the pain-points become too glaring to ignore.
3. Technical Debt
Now consider your system itself.
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:
The sunk cost “fallacy” isn’t really a fallacy. It’s a psychological pitfall, and in many cases, you can avoid it through simple awareness. Think through your past decisions, recognizing when a false sense of commitment warped your choices. Know where you and your team are uniquely vulnerable to sunk costs. Simply put, your dread of change should never eclipse your need for it.
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 ERP 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 Cloud ERP 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 97% customer retention rate. That’s lifetime, not year-over-year—we have retained 97% of all customers since our founding. Our recommending network includes KPMG, PwC, and BDO. For more information about Xledger and how we can serve you, please get in touch.