Most established businesses have a solid IT infrastructure in place. But while the infrastructure does the job, it relies on legacy systems that are outdated, clunky and unable to integrate with more recent innovations. Admitting when it’s time to change? That’s a common challenge, known as the sunk cost fallacy.
Introducing the sunk cost fallacy
The sunk cost fallacy is a natural tendency to continue implementing a strategy because an organization has invested in it, even when it’s clear that abandoning it and taking a different course would be more beneficial. Sunk costs — those that have already been incurred and can’t be recovered — are often to heavily taken into consideration when making business decisions. This commonly results in a block on investment into new technology or digital transformation as the process and solutions that are currently in place and have been invested in. While not fit for future purpose, they adequately fulfil the immediate needs of the business.
But it’s when organizations start considering their sunk costs when determining strategy that irrational decision-making — the sunk cost fallacy — comes into play. The sunk cost fallacy is something that is typically an issue for more established companies with significant legacy infrastructure and technology that has underpinned their core processes for a long time.
There are several reasons why businesses fall victim to sunk cost fallacy. First, there is a perception that undoing old projects and integrating a new digital transformation plan to sit alongside all of this legacy complexity will take too long and cost too much. Additionally, it’s commonly perceived that the commercial benefits of making such a large, strategic change will take too long to realize and are too hard to quantify to make it worth the effort. Additionally, on an individual level, people naturally find it difficult to accept loss in any form and prefer to follow their decisions through, even when failure is inevitable.
Sam Dunscombe is Head of Growth at Mobilise.
A short-term fix
Despite this, there’s a growing number of applications where taking a different course of action is unavoidable. It might be an individual project, or one business area that desperately needs a quick fix to their digital needs. Short-term trading, the drive to maintain a competitive edge and the need to respond to market conditions mean that most organizations tend to opt for the fastest solution, which is to implement a new singular proposition or project in silo with existing infrastructure.
While this fixes the imminent issue, it doesn’t support the organisations’ long-term technological development. Siloed systems aren’t something to shout about either — they prevent overall visibility of a business’ data and activity, and arguably create an even more complex, entangled system than the original legacy system that was in desperate need of an upgrade.
While the sunk cost fallacy is a problem that all organizations face, it is particularly pertinent in telecoms, where established service providers (SPs) implemented a system ten or 20 years ago and are unwilling to let it go. It’s also common that, despite being new to market, hyper agile and successful in their own industry, a business faces hurdles when it wants to move into a vertical or offer a different suite of services.
Short-term pain, long-term gain
It’s clear that in the long term, the ideal solution is to transform the technology stack into a digital, agile platform that has the capability to make quick changes, add new functionalities and react to market fluctuations. But the sunk cost fallacy is preventing SPs from making this switch.
There’s also an added layer of complexity pertinent in telecoms too, in that established SPs have a longstanding tendency to keep all of their technological development in house. While this strategy worked ten years ago, it’s no longer fit for purpose. Across any industry, the businesses that are disrupting the market are those partnering with external experts.
According to Equinix, 62 per cent of IT decision makers globally cite a shortage of talent as a principle threat to their business’ success. There simply isn’t enough talent for each SP to have its own in-house team implement a successful digital transformation. Additionally, the expertise of an in-house team will never contend with the expertise of a partner, that specializes in and has the experience in supporting several SPs to do the same thing.
In order to untangle the web that legacy systems often create, organizations need a sophisticated platform that either replaces the old system or sits on top of it as an additional layer and makes sense of the chaos below.
The truth is that sunk cost fallacy is part of human nature. But just because it’s natural, doesn’t mean it’s the right thing to do. Changing course when a better option appears is the key to success. And for digital transformation and new technology adoption, this involves admitting when you’re out of your depth in-house and partnering with an expert to guide you to success.
