The sunk cost fallacy is the tendency for people to hold onto something, use something or stay with something that they have already spent money on, even if they don’t want to.
We keep clothes in the wardrobe that we never wear and don’t particularly like, simply because they were expensive, whereas we will easily throw away or donate an item of clothing that was much cheaper.
By keeping the expensive items people feel that the money they spent hasn’t been wasted, but here lies the fallacy – the money is already gone, so there is no use in worrying about it.
This holds true for what we call the IT cost fallacy: companies keep using an existing business system that is ineffective, inefficient and not fit for purpose, just because of the financial investment they have already made in it.
SaaSam Group General Manager, James O’Regan, says businesses consider past or ‘sunk’ costs in their decision making as it relates to the costs of future projects:
“This is a common problem that we encounter with prospective and existing clients; many of them are persisting with a system that works ‘well enough’ and they aren’t willing to part with it due to the money and time they have already invested into it.
“A bad, cheap system that is already in place may look better on paper, however, there are hidden costs to using a system that is poorly implemented, badly maintained and can’t integrate with other key business systems. A good IT system may require significant investment upfront and the potential savings can be hard to see at the outset when your focus is on the bottom line, but a good system can be invaluable.”
According to software company, SpringCM, 64 percent of businesses say that settlements are being hindered due to poor contract approval processes. A better contract management system will give a business the transparency and accountability necessary in order to maintain sound customer relationships, meet compliance standards and keep business moving forward.
At SaaSam we believe that good IT products are:
- Customisable: able to be tailored specifically to a client’s needs.
- Integrateable: able to easily talk with other products in your IT infrastructure
- Beneficial: The new system will save time, effort and resources, as well as reduce mistakes and lower human error.
Money spent on a new business management system shouldn’t be seen as money lost: World Commerce and Contracting states that organisations could increase their revenue by 9.2 percent each year with more careful contract management, for example.
When making a decision to switch to a new system, companies shouldn’t be worried about the cost of the old system at all, they should only be concerned with what the new system itself will cost and the cost savings over time that can be achieved by switching – which can be significant when an intuitive system is in place.
“Often the best way forward is to cut your losses and commit to a better alternative,” explains James, “because making decisions based on money spent is a lot like making decisions under duress. If the rational decision is to move on, then that’s usually the best solution.”
