When should I commit resources to new projects?
By Gary Cohen
"Be careful what you wish for," the old saying goes. Maybe it should be "Be careful what you begin" instead. Once you commence a project, you are (perhaps unwittingly) attaching yourself to a trajectory. If you're not careful, you may find yourself unable to hop off that trajectory, simply because you have invested too much time, money, and effort to accept failure.
Motorola wanted to make consumer-based satellite phones. When they completed the first phase of their business plan (creating the technology), they realized they didn't have a viable marketing plan that would account for the high cost of delivery. Had they done so, they would have saved billions of dollars.
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At the University of California at Berkeley, Barry Staw conducted several research projects investigating how commitment to a failed course of action can escalate. Business students read the fictitious case, which has had a long, profitable history but now appears in trouble. Acting as financial VPs, students are asked to invest $10 million in either the company's Consumer or Industrial products division. After they have made their decision, time is accelerated to five years later. Half of the VPs are told that their original decisions were successful: The division that received the extra funds had turned itself around and looked as if it would continue to be successful. The other VPs are told that their decisions unsuccessful: The division that had received the influx of money was doing worse than ever. After this news, they must invest up to $20 million more in either of the two divisions, Consumer or Industrial products; this time they can divide the money any way they like. People whose previous decisions were unsuccessful pour more money into that same, failing division. Not only that, when they also face a serious personal threat (that is, losing their job), they commit even more to the unsuccessful division. Commitments do not escalate, however, when decision makers know that they will be throwing good money after bad. Only when they have hope of escaping the costs of previous poor decisions do decision makers escalate their commitments. - From Bargaining Games, Copyright
1992
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The study above, done by the authors John Keith Murnighan of Bargaining Games, indicates how psychologically attached we become to our failures. Instead of focusing in this column on how to learn to cut your losses, I want to address the issue on the front end: When should you escalate your commitment to new projects?
Here are some questions to ask in the early stages:
- Do you think future gains are possible, and what are the risks you would be willing to take for those gains?
- Is optimism blocking you from seeing negative consequences?
- Has the team over-advocated for the project, and do they now feel vested or personally identified with the outcome?
- If faced with a worst-case scenario, would you still be able to walk away without a significant loss?
By the time you find yourself asking, "What propelled us to move in this direction to begin with?" it's usually too late to escape without disastrous, unimagined consequences. Save yourself the shame of having to admit your error by analyzing everyone's investment in the project at the outset, including your own. Imagine worst-case scenarios. And ask yourself, "How far are we willing to proceed before we cut our losses?"
