A popular term in economics, accounting, and finance is “sunk costs” which basically means costs that have already been spent. These costs may be from software purchased, processes redesigned, machines purchased, consultants hired, etc. Whatever the costs are it has been spent and there is no getting it back.
Instead of looking at what has been spent you need to do a fresh analysis right now to determine what decision you would make looking at things are fresh. This might mean going a completely different direction in software or equipment used.
Of course there are political dynamics here because somebody made that decision to spend money previously and if the course changes there are always questions that arise and there are people that will defend actions. In a later post we will discuss this and other potential things to take into account when making decisions counter to past decisions.
The following are things to remember when making a decision that could be impacted by “sunk costs”:
- Analyze fresh: Remember sunk costs are just that – sunk. Do not include them in your calculations and make fresh decisions whether it is on changing a process, software, or hardware.
- Do not get emotional: Avoid that emotional tug you and others may have to feel bad about money and time previously spent. Getting someone involved that does not have emotional baggage on the particular item is best.
- Understand history: Oftentimes new people come into a department and are quick to find things that are “wrong” and should be changed. Getting fresh perspective is vital. However, understanding history and why decisions were previously made will help you ensure your new analysis takes into account all needed items into the calculation at hand.
It is important that you as an individual contributor or leader understand sunk costs and how to take a fresh lens to a problem and ignore these sunk costs in making good decisions will ensure that sunk costs do not sink you.
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