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Software Implementations and the Sunk Cost Fallacy

Let’s say you buy nonrefundable, nontransferable tickets to see the Superbowl. In economics, that’s a “sunk cost” – an irretrievable past expenditure.

Now say the Superbowl comes and you feel sick. Really sick. You’re convinced that going will be less fun than staying at home – but because you bought the tickets, you go anyways (and have a terrible time, especially if you’re a Broncos fan).

"Sunk cost" - get it?

“Sunk cost” – get it?

Game theorists call this self-defeating behavior the “Concorde fallacy,” after the ill-advised Concorde plane, which operated for decades despite never making (or being projected to make) money. Economists call it the “sunk cost fallacy” – making choices based off past costs, not future benefits.

Implementing software requires lots of sunk costs. Maybe you trial competing systems; maybe you hire a consultant; probably you do both. Hours are spent comparing features and evaluating workflows. Once you’ve chosen something, there are customization, migration, and training costs. It’s an expensive and all-too-familiar headache.

Traditionally, when software doesn’t perform – when it’s painfully, clearly obvious that the current system doesn’t work – most businesses are reluctant to change. They know they need something different – but change means accepting the tremendous time and financial costs already incurred. That’s painful.

This is one area where cloud computing offers a distinct (yet under-appreciated) advantage over on-premise counterparts. During virtually every step of a large-scale software implementation, cloud-based software makes change cheaper. Consider:

  • Cloud-based solutions are easier to evaluate. Most solutions offer trial access with just an email address, so even non-tech savvy people can get their feet wet. Don’t take that for granted (it wasn’t always so).

  • Cloud-based software is easier to customize. Customizing on-premise solutions typically takes technical consultants, if it’s possible at all: any cloud solution worth its salt offers strong customization capabilities.

  • Cloud-based software is easier to migrate to (and from). Open APIs mean your data is yours, not your vendors (though there are still significant development costs).

  • Cloud-based software is (usually) easier to train. Because cloud vendors push updates much more frequently – and because most cloud software is redesigned regularly – cloud solutions tend to be easier to use (and so easier to train).

This isn’t to say that cloud computing makes changing systems easy (it doesn’t). Migrating between any system is stressful and costly, especially with sunk costs in the system you have.

But compared to the multi-million dollar software installations of yesteryear, cloud-based software has made changing systems smoother – and made the cost of mistakes a bit easier to accept.

VM Associates is a New York City cloud computing consulting firm. We help companies transition into newer, better, smarter software. Contact us to talk about your business, the cloud, and how we might help.

The post Software Implementations and the Sunk Cost Fallacy appeared first on VM Associates.

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Chris Bliss works at VM Associates, an end-user consultancy for businesses looking to move to the cloud from pre-existing legacy systems.

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