by Rob Enderle

An IT Lesson From Grandma: Don’t Let Sunk Cost Get Out of Control

Aug 17, 20125 mins
Financial Services IndustryIT StrategyProject Management Tools

A fable that columnist Rob Enderle heard from his grandmother many years ago still resonates today. The message is simple--if you pour salt into a pot of tea, pour it out and start over--and it applies to many an IT investment.

It is funny how some of the old stories come back to you. One stuck with me over the years—and it just saved me a ton of money.

Apparently this story is one of a number of fables my grandmother heard when she was growing up, and it couldn’t be more pertinent today. It speaks to how we often make decisions and suggests that the better, cheaper path is the one we’ll try to avoid like the plague because it requires us to first admit that we made a mistake.

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I’ll tell you the fable as best as I can remember it, apply it to a recent hobby project I was working on and conclude by bringing it back to IT.

The Fable: Fixing a Bad Pot of Tea

There once was a woman who made a pot of tea, but instead of putting sugar in it, she accidentally added salt. She was at a loss. She went to her next-door neighbor and asked for some help. Her neighbor said that pepper is the opposite of salt and might make the tea better. The woman tried that but wasn’t a fan of the salty, peppery tea. So then went to another neighbor, who argued garlic was strong enough to overcome both flavors, but that made the tea even less tasty.

This went on for most of the day as the woman added more and more ingredients and her tea became less and less drinkable. She finally ended up at the home of the smartest woman in town. Upon hearing the story, this woman shook her head and advises, “Pour it out and start over.” This fixed the problem.

My Own Experience: Building a Hot Rod

This summer I decided to revisit my youth. I bought an older Jaguar with the idea that I would turn it into a hot rod. After putting thousands of dollars into the project and looking at spending thousands more, I stopped and remembered my grandmother’s story. I sold the car and started over with one that already had most of what I wanted. I not only saved thousands of dollars—I ended up with a better car.

Remember, You Can’t Get Sunk Cost Back

The fable and my personal experience teach a concept we often forget to apply: sunk cost. Whether the initial decision to buy a technology is prudent or not, it will eventually become obsolete or cost more to maintain than it is worth, particularly when compared to something that is more capable. However, because we either are afraid to make it look like an early decision is a mistake or focus too much on patching a problem, we don’t step back, take a breath and compare the costs and benefits of patching something instead of replacing it. We can go the other way, too, and recall the Dataquest surveys that followed the client/server wave, when the vast majority of customers moved prematurely and regretted their decisions.

Look at money you have spent the same way you look at food you’ve already eaten. It’s gone, and it has no bearing on future decisions. You need to compare choices based on what they will cost against future benefits. There is no difference between $10 that’s already been spent and $1 billion already spent.

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The National Security Agency whistleblower incident—picked up by The Daily Show—shows the danger of overemphasizing sunk cost. The whistleblower, Thomas Drake, claimed the NSA was wasting $1 billion on a telecommunications data collection program that could be done in-house for $3 million. Drake was charged with violating the Espionage Act of 1917, but the case fell apart. In the end, it would have cost a fraction of what the NSA still owed defense contractors to implement the inexpensive, in-house system—and the benefits, which might include you and I not getting blown up—would have been more immediate.

Don’t Be Afraid to Cut the Cord

For major products, in terms of both cost and importance, regularly conduct a cost/benefit analysis on what it would cost to fix them vs. what it would cost to start over and replace them. Particularly for projects that have been going on for years, unsuccessfully, you may find that cutting the cord and starting over is the faster, cheaper way to get to the desired result. All you have to do is figure out how to get out of the related contracts, keeping in mind that there are generally clauses that let you get out of a project if it isn’t meeting your expectations.

The nice thing about the cloud world in which we now live is that we can either replace or emulate a large IT shop with a service. This makes testing a technology under load before deployment easier and deploying it far less risky.

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It also means there are likely thousands of projects in process that would be far cheaper and better—and might even be done more quickly—if you just start over. It’s something to think about as you enjoy the summer heat.

Rob Enderle is president and principal analyst of the Enderle Group. Previously, he was the Senior Research Fellow for Forrester Research and the Giga Information Group. Prior to that he worked for IBM and held positions in Internal Audit, Competitive Analysis, Marketing, Finance and Security. Currently, Rob writes on emerging technology, security and Linux for a variety of publications and appears on national news TV shows that include CNBC, FOX, Bloomberg and NPR.

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