Thursday, November 1, 2012

The Company/Project Killer: Sunk Costs!

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We are Human Beings. Our passion and commitment drive us to make projects and companies successful. Yet these same passions and commitments emotionally “marry us” to doomed projects and cash-hemorrhaging policies with can destroy us. These sunk costs, if unrecognized, become an ever-hungrier black hole which can consume enough resources to kill an entrepreneurial early-stage or thinly-capitalized company, or cause us to work on a project which is unsalvageable by any means.

From the standpoint of behavioral psychology, we are too often obsessed with a need to be right. The tendency is for us to equate our own self-worth with a project, business or achievement -- as if a single decision (regardless of how large or how small) -- could define us, both to ourselves and others.

Here’s the irony: The more we have invested in a project or business, the more emotionally attached to it we tend to become. We lose our ability to dispassionately judge This is true, even if the project or business decision is so bad that the vultures are circling above us and our colleagues have begun wearing face masks because the smell of decay and impending death are all around us. And yet we think (or if we are really insecure, we shout out, like the captain on the Titanic), “full steam ahead,” “we just need to spend a little bit more,” or “I just know I’m right -- I can feel it.”  We are attempting to justify ourselves and our incorrect decision in order to spare our egos.

Stop watering a dead tree. The tree will never grow, and your water bill will become enormous.

Businesses strive to maximize profitability by making the most efficient use of assets to produce revenues, and by controlling, or eliminating liabilities or unproductive costs. Sustainable profitability and wealth-building require these steps.

It follows that unproductive projects or other costs (in terms of cash-draining pet projects or investments, and recurring costs which generate no return and which do not support an income-producing function) should be identified as soon as is possible, and should, accordingly, be dealt with...and dealt with quickly.

These unproductive costs drain Human, financial and productive resources -- further, they divert all of these resources and attention from other viable opportunities (i.e., the "opportunity cost" or "opportunity loss" factor). Unproductive or sunk costs are just misspent money based upon poor decisions - they cost us twice when we factor in the loss associated with tying up valuable resources which could be otherwise focused on or invested in revenue-producing winners.

Just as you cannot put a bandage on leprosy to any great effect (nor should you continue to water a dead tree...better to conserve water), continuing to subsidize an inherently unprofitable project, or continuing to incur unproductive costs for emotional, self-justification or political reasons will destroy your company or organization from within.

What To Do:

Every month, analyze, line-by-line, all of your expenditures, and each of your projects or product lines as a profit center. Assess each, in isolation and based upon its own separate accounting, in terms of its demonstrated merits.

Some investments take time to bear fruit, just as some costs take time to translate to revenue production -- but learn to draw a line: Just how much money and time are you prepared to invest in each of these things? Budget yourself on maximum "trial" time and maximum investment. Do this unemotionally. Realistically. For the good of your enterprise.

As a leader, as a project manager, as a strategic must have the discipline to know when to terminate a project or stop paying a bill, and to take action without continuing to "throw good money after bad."

If you're concerned about the feelings of people within your organization regarding their "pet projects," "dreams" or favorite black hole costs, think of this:

In indulging one person's flimsy whimsey or foray into the bottomless pit of egomania, your company will eventually go out of business. Once that happens, everybody in the company loses - employees, stakeholders, clients or customers, vendors, and the economy-at-large. Are you willing to hurt all of these parties because you feel a need to indulge your ego or anyone else's? Legal, sustainable profitability is ultimately for The Greater Good.[Is it just me, or do you hear angels playing harps?]

Tidy up for spring. Prune back the dead branches. Cut losses rapidly. Don't enslave your company to an insatiable, internal beast which subsidizes its own parasitic existence by eating resources out of your viable profit centers. And don’t spend money trying to salvage a project once your logical sense has told you that the project is a loser. An albatross. A stinker. A money pit.

In sum:

1) Budget each project in terms of time and money;

2) Analyze each project and its related costs and benefits frequently, and with the consultation of colleagues or outsiders who can be more objective than you can be;

3) Learn to recognize and admit losses -- don't engage in self-deception or "pet project addiction";

4) Stop funding (or feeding) the parasitic components of your business immediately, as soon as you recognize them;

5) Carry on, look forward, and be glad that you've cut losses - its better to spend a bit of time and money on an education by making a small mistake than it is to throw away an opportunity for a fast recovery, increased profitability and future success. Don’t call a loss an “investment.”

While this is all easy for me to say, the project or the business is yours.TechRepublic recently featured an article which deals with minimizing the pain of killing a project, and you may find it helpful to read before embarking on any project decision or upon any major strategic business direction, transaction or technology. While I have only outlined the steps here, I have included a live link to the entire article at the end:

10 ways to minimize the pain of killing a project

By Mary Shacklett
October 24, 2012, 5:51 AM PDT

1: Include pulling the plug in your strategy

2: Pull the plug early but not too soon

3: Have alternatives

4: Protect the project from subterfuge

5: Conduct pilot studies with vendors before you invest

6: Whenever possible, put unpluggable projects in the right place

7: Accept responsibility

8: Learn from the experience

9: Gain consensus

10: Maintain a positive attitude

To read the article in its entirety, click on [10 Ways]

To lead effectively, it takes courage...and the ability to recognize and acknowledge mistakes, and to rectify them before they become tragedies. One bit of philosophy and creative psychology which you can take away from this article is that your value, self-worth, or worth to your organization is not measured, nor can it be determined by any single decision - wrong or right.

Douglas E. Castle for The Business And Project Planning And Management Blog, The CrowdFunding Incubator Blog, The Mad Marketing Tactics Blog, The Internationalist Page Blog and The Global Futurist Blog.

If you found this article enlightening or helpful, please share it with your colleagues and your social networks. Thank you in advance. And DO remember that a retweet will make us complete [are we blushing?]

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