The Fallacy Of Sunk Costs

The Fallacy Of Sunk Costs

You’ve probably heard of the phrase “Throwing good money after bad” before. Most people would hate to knowingly waste their money, and would regret having done so. However, due to the “sunk-cost fallacy,” many people would put more money and time into a venture with an uncertain outcome or result, rather than look at it from a logical and economically sound viewpoint, and admit they were wrong. When analyzing business decisions, the idea of sunk costs often comes into play. Most economists consider it an emotional decision, driven by the all-too-human desire not to waste something that has already consumed a good deal of resources and time. From an economic viewpoint, looking at sunk costs is inefficient due to the dependence on irrelevant information to arrive at a decision.

The financial disadvantages of on-premise systems

Many companies keep pouring in more money into outdated on-premise business software and the associated support systems, power-hungry servers, IT personnel and recurring upgrade and maintenance costs. The sunk cost fallacy manifests itself when managers feel compelled to keep using the on-premise systems, infrastructure and support systems that they spent heavily on over the last 10 years or so.

Companies that have invested heavily in complex business applications often discover—much to their dismay—that it takes several months, and sometimes years, to roll-out across their organizations. Gradually, disappointment sets in when some of the purported features of the much-touted business software turn out to be not-so-useful or applicable to their specific business needs. To compound matters, the realization sets in that some of the promised benefits that would result from using the complex software suite do not materialize, or take an inordinately long time to provide measurable ROI.

Why transitioning to the Cloud is a financial imperative

Wouldn’t the best alternative be one that is faster to roll-out and use, better in terms of efficiency and results, and cheaper in Total Cost of Ownership (TCO)? Not surprisingly, a growing number of companies are transitioning to modern cloud-based HR solutions that provide a plethora of advantages. It’s clear that inherent inefficiencies of on-premise business software applications costs companies a lot of money in inefficiency in the long term. Again, due to the sunk cost fallacy, companies are not willing to pivot and switch to better cloud-based solutions that provide a multitude of benefits.

Conclusion

Forward-thinking organizations looking to implement workforce management solutions generally take into consideration future costs, such as potential infrastructure maintenance costs, the utility derived from system reliability, and replacement costs. Adopting cloud-based solutions allow them to replace periodic (and often fluctuating) capital expenditures with predictable and stable operational expenditures, which can make a big difference to the bottom line. Not surprisingly, we are seeing rapid growth in adoption of Cloud-based business and workforce applications.

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Praveen Krishnan
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