Updating & Maintaining Business Systems: At What Point Does It Become A Sunk Cost Fallacy?
Ever heard of Occam’s Razor? It’s an age-old philosophy that goes along the lines of: If you come to a complex issue, and you’re struggling between two answers to the problem – the simplest answer is generally the closest to the truth. If an answer seems too complicated or makes you go around in circles to find a solution, you’re on the wrong path. This is fundamentally true when talking about business technologies. If you’re using spreadsheets and you have three or four of your employees working overtime on organizing files to document your financials, then the problem is not your employees. It might be time to consider moving up from spreadsheets. (Learn more about the danger of spreadsheets)
But we’ll come back to that. Firstly, let’s talk about long-term planning and budgeting.
There comes a time in the growth of any business where all the executive sit around a table and look at their long-term plan. “Where are we aiming to be next year, 2 years from now – in five years?” This conversation is broken down into parts:
- Looking at what’s worked in the past and what isn’t working anymore
- Defining budgets and strategies for the future
The goal of this exercise is to come to an understanding of how to move forward, having pinpointed exactly which areas of your company infrastructure require an upgrade.
For example, have you invested in any systems that you’re now outgrowing due to steady, financial success? While investing in additional repairs or maintenance can help alleviate overhead on the short-term, especially for a growing business, you will find it quickly becomes outdated. However, you would be surprised at how many large companies will not immediately take notice – instead of upgrading solutions, they will hire more staff or overburden their existing staff to compensate for lacking or non-existing functionality in what should be a solution to make your team’s day to day easier.
Another common struggle is that your team is expanding too quickly – along with your portfolio of projects. If you’re a project driven company, then this is a crucial turning point for your business, to ensure that you have the right technology in place to help manage new clients and their needs. Recently, the Gurus team helped a rapidly growing Montreal business with a similar obstacle take the next step in what [Gurus] CEO Martin McNicoll refers to as “future-proofing” their infrastructure.
And then, there’s the dawning reality that your company might be relying on an aging workforce. Often times, this is the case when you’re dealing with older business systems that need to be frequently updated and managed. You have a team on the clock to repair your systems and ensure they’re working. Your employees have been working there for many years and they’re accustomed to specific operations – so why change things now? You don’t want to frustrate your veteran staff, so you struggle to find complex operations to work around your old systems. How can you keep things going “the way they’ve always been” for as long as possible? After all, it worked for you in the past. Harvard Business Review recently published an article on “retirement-proofing” your business, which notes that “In the United States, there were 65 million people over the age of 60 in 2017. This number is expected to grow to more than 77 million by 2020.”
There is a tsunami of retirements predicted to be headed the way of today’s business world within the upcoming years – and future-proofing means preparing for scenarios like this. You want your systems for business growth to outlast your veterans and not the other way around, so that your business processes are never vulnerable when a star employee leaves for retirement. Sure, as the article goes on to point out, many large companies in the U.S. and Germany work around this by bringing back retired veterans on expensive contracts to help them transition systems – but why add the unnecessary expense later when you can start the transition now? Why risk a business disruption that could potentially cost you several times more than upgrading your systems in the first place?
Here’s where the Sunk Cost Fallacy comes into play. Often times, a growing business will be reluctant to change systems even if they see clear signs that their team is rapidly outgrowing them - or even that their old processes are beginning to cost them. Having worked with countless companies that have come to us at the eleventh hour looking for a fast solution to get them out of the hole during a busy period, I can tell you that this is a crucial deciding moment. It might be one of the most significant decisions that you make during the growth period of your company – and more often than not, you will risk hurting your long-term profitability.
It’s easy to think new system = added expense. However, you have to look at overall picture of what that expense is for and how it will benefit you and save you costs over time. Upgrading your systems is an investment into your own ensured success. Maintaining a system, on the other hand, can end up being quite costly - especially with older on-premise technologies.
Recently, I sat down with a friend and we got into a conversation about losing time. What is the value of time in terms of business success? She was telling me that her department was refusing to upgrade a software that was so outdated that it was impeding their team from efficiently doing their job due to the high overhead required. Naturally, I asked why her executive board was against an upgrade. It turns out that they had invested a lot of time, effort and resources into building out their current system and were reluctant to make a change so soon. Once again, she pointed out that they were losing time and productivity. They had an entire staff working around the clock to coordinate spreadsheets and emails to keep track of inventory. And every time there was a mistake - well, that meant overtime. (Have you seen our popular NetSuite vs. Spreadsheets video? It was exactly that). In cases like this, for example, upgrading to a back-office platform like NetSuite can be a scary endeavour because it’ll be a new technology. That means data migration, training for staff, and becoming accustomed to a new way of doing things. Do you know what that’s called?
The 'sunk cost' fallacy: Are you familiar with this term? It's why gamblers lose everything at the casino, it's why people stay in unhappy relationships, and it's the best possible way to sink your spirit, income and your time in whatever investment you make - whether professional or personal.
The sunk cost fallacy refers to when you invest so much time, energy and emotion into something that it becomes impossible for you to move on or abandon it when it stops working, or even impedes you from progressing. The reasoning is, "Well I already got this far, why change route now?" And you keep going at it until you exhaust yourself, your finances, and time that could've been better spent. If this sounds like your case, then the best possible solution is the easiest one - it’s time for a change.
In other words, if you clicked on this article because you’re unsure about repairing an old system or process - the answer is, don’t. Don’t spend another dime on your system if it’s not bringing you the results you want. Stop hiring more staff to work around avoidable issues. Still unsure? Here are the 6 signs that you need to watch out for - if you start noticing these symptoms, then it should make the solution easy for your board.
Best of luck - and remember, future-proofing your business for tomorrow starts today.
Talk to an expert about upgrading your business systems, best practices, how to plan out a transition, and any other questions you might have: firstname.lastname@example.org.
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