How many of you remember the infamous enterprise resource planning systems or ERPs? Although some ERP system implementations were successful, some never made it pass go. Yet, they continued to get funded. Why? Can psychological traps in decision-making be the culprit?
In the early 2000s, the military launched several ERP system implementations. Without rehashing history, unfortunately, there were many failures. For example, one specific program was designed to help streamline the maintenance and logistics supply chain. By replacing outdated systems with a more robust and single integrated system, this ERP program was poised to meet that objective. Yet, as history would record, that was not the case.
As a former Director of Information Technology in the Air Force, I was very familiar with several of these programs. Although, there were many factors that contributed to the failure of some of the ERP system implementations, sunk-cost decision-making bias was a prime candidate. For example, according to congressional testimony and numerous publicly released documents, for seven years over $1 Billion was allocated to one specific ERP program that returned zero for its investment. Imagine what would have happened if the decision to finally cancel the program had not been made?
So, how can decision-makers avoid the sunk-cost trap bias? I propose five things:
- Foster a workplace culture in which program managers are not afraid to present an accurate picture of the project.
- Be prepared to modify and reduce program requirements in an effort to eliminate any additional sunk-costs.
- Acknowledge the sunk-costs and assess the risks involved in making a change.
- Do not allow sunk-costs to force you to continue making obtuse program budget allocation decisions. And finally …
- Do not be afraid to cut failing programs.
Effective decision-makers must be willing to make unpopular decisions. Programs are always subject to potential schedule delays, cost over-runs, and project modifications. Having the fortitude, to stop a failing program, enables management to avoid falling victim to the sunk-cost trap bias.
Now that you have been warned, do not let this trap capture you.