The Upside of Quitting a Project
You’ve got to know when to hold ’em
Know when to fold ’em
Know when to walk away
Know when to run
Kenny Rogers – “The Gambler” www.youtube.com/watch?v=Jj4nJ1YEAp4
I think “The Gambler” has been banned in Las Vegas. The song reminds us that in poker, folding is a huge part of the game. The ability to quit our hand lets us choose favourable circumstances for ourselves. It also allows us to take risks, knowing that if things don’t take a positive turn, we can always abandon the pursuit.
Similarly we might abandon a project mid-course for a variety of reasons – deliverable (output) and/or outcomes is no longer needed, completion date can’t be achieved, costs exceed budget and/or anticipated benefits, technical requirements prove to be unachievable, expertise unavailable, project priorities change causing a re-allocation of resources, sponsor or client changes their mind, the project does not comply with latest legislation, market circumstances change, or someone else has produced a more competitive product or service.
Given that there is often a considerable investment of time, effort, resources and money, stopping a project before its completion is a difficult decision, although the sooner an inappropriate project is stopped and resources released for other purposes the better, and preferably before implementation during which project phase most costs are usually incurred. To fail early is to fail cheaply.
The problem is sunk cost or stranded cost – the cost that has already been incurred and cannot be recovered. Even wars have been continued because of sunk costs and have we ever sat through a bad movie because we did not want to “waste” the money we paid for the ticket? If so, we have suffered the sunk cost fallacy, which occurs whenever we let unrecoverable costs influence our current decision-making. In this picture the monkey faces such a dilemma… should it cut losses and go for the better prospect?
The sunk cost fallacy is sometimes known as the “Concorde Fallacy”, referring to the fact that the British and French governments continued to fund the joint development of Concorde even after it became apparent that there was no longer an economic case for this supersonic aircraft. The project was a commercial disaster, but political and legal issues made it impossible for either government to pull out.
However, when project sponsors consider aborting a project, they may view the past investment in the project as wasted resources and this aversion to wasting money leads them to continue investing in the project in the hope of utilising, rather than wasting, the investment to date. Therefore, sponsors may pursue unsuccessful project investments, perhaps “throwing good money after bad.” Even politicians might continue a bad project to delay a reputation loss especially if they are more interested in remaining in power than serving the public.
Also, organisational culture may encourage the sunk-cost effect. Individuals in certain cultures may overly value persistence and perseverance. We often hear corporate leaders exhort their people to demonstrate a “can-do, never give up” attitude. This “no one likes a quitter” attitude means that individuals may perservere with “dead projects walking.” Such cultures may also discourage people from readily admitting mistakes. People may not cut their losses out of fear of being blamed for the failure.
In continuing with a losing project we fail to evaluate opportunity costs. By sticking to the current project, we forsake other possible uses for the physical, financial and human resources. The opportunity costs associated with sunk cost projects can be huge. Imagine what we could do with the money and people freed up from cancelling such projects. [The difference in return between a chosen project and one that is necessarily passed up is opportunity cost. Say we invest in a project and it returns a paltry 2% over the year and in making this investment we gave up the opportunity of another investment yielding 6%, our opportunity cost is 4% (6% – 2%).]
How much value do we destroy by making people feel as though reversing direction and cutting losses are things about which we should be ashamed? Perhaps we should strive to create an organisational climate that makes admitting and learning from mistakes as valued as persistence and perseverance?
Sunk costs should not be considered when making the decision to continue investing in an ongoing project, since we cannot recover the cost. However, many managers continue investing in projects because of the sheer size of the amounts already invested in the project. They do not want to “lose the investment” by curtailing a project that is proving to be unprofitable, so they continue pouring more cash into it. Of course it’s hard to abandon projects in which we have poured time and money, especially when we have also attached to it our ego and reputation. It’s perfectly natural to feel attached to our sunk costs. It sucks to acknowledge that we’ve wasted time, money, energy, and reputation. We tend to be adverse to taking losses, which is why it is so hard for us to walk away from something once we have incurred sunk costs. The difficult call to make is whether to throw good after bad (and see something through given it might prevail, after all) or to draw the proverbial line in the sand. It’s not about giving up because of setbacks. It’s about giving up when the ONLY reason we’re continuing is “well, we’ve come this far” even when there’s a clear alternative.
In conclusion, here are some suggestions regarding project sunk costs:
- We should make go/no go decisions based on project marginal costs and benefits. If a project yields positive net incremental benefits, then we should continue to pursue that course of action. The amount of any previous irreversible investment in that project ought not affect the decision. Prior investment, which cannot be recovered, represent sunk costs which should not be relevant. If the ROI will be less than the additional resources that need to be expended to achieve the return, the only sensible decision is to kill the project regardless of the amount of cost and time already expended. Wasting more resources does not mitigate the waste to date. However, if the ROI will be more than the additional resources that need to be expended to achieve the return, but will be insufficient to cover the overall cost of the work, expending the additional resources to reduce the overall loss may be sensible.
- The project sponsor must periodically re-evaluate the ROI on the project. Circumstances change – costs may have escalated, the demand for the product may have diminished, some other outfit has just launched a better product etc. Most importantly, all projects must have a business case that argues the rationale for the investment. However, the project business case should be regarded as a “living” document that is reviewed periodically as new data comes to hand and circumstances change. If the rationale for the project diminishes, it might be time to stop the project, but to do so is not usually our call as project managers. Usually it is the project sponsor’s decision. We project managers are often more concerned with getting to completion on time, within budget and producing a deliverable to meet specifications.
- The ‘kill’ decision needs good information, careful analysis, clear thinking and a degree of courage to act on the available data. Unfortunately this type of decision is not always based on rational thinking – emotions and innate biases have a major effect.
If we do stop the project we need to prepare a cancellation plan with appropriate legal, human resource and stakeholder input. The plan should explain why, how and when the project is to be cancelled. Project team members will need to be reassigned to other projects or to return to their regular jobs, a post project review will be needed and project documentation retained as appropriate for future projects, or for any potential project revitalisation. Work-in-progress might be adapted to other purposes. Thus, sunk costs may be a learning experience and embracing things learned from project cancellation makes it all a bit more palpable. So killing a project needn’t be a complete loss. It can be easier to hit the stop switch if we have a post-mortem process that captures whatever valuable data or lessons were encountered during the project. Thus, cancelling a project unlikely to deliver expected benefits should not be seen as a failure — failing to cancel such a project should be.