How never-say-die optimism can kill you

Reader ROI

• Why people downplay evidence of failure and put off the tough decision to bail out
• How to identify biases and understand when they may hinder an objective evaluation
• How to create mechanisms to prompt a timely exit move

The burghers of British Columbia blithely ignored predictions of fiscal ruin when deciding to stage the world's fair, Expo 86, in Vancouver. When budget blowouts loomed, organizers produced a flurry of overly optimistic revenue and cost estimates, as if by fooling themselves they could somehow fool life itself into conforming to their wishful thinking. Yet even after that effort failed and the financial predictions became so clearly dire that the fair's director recommended cancellation, BC forged ahead with its Expo plans. Ultimately, only a lottery saved the Canadian province from financial disaster.

Likewise in the early 1970s executives at US company Joseph Schlitz Brewing, entranced with market research that purportedly showed people could not tell different beers apart, decided to adopt a cheaper brewing process. Lower sales should have been proof enough the research sucked and that people in fact hated the taste of the new beer. Instead, filled with never-say-die fervour, the executives stuck with their low-cost strategy until Schlitz, once the third-largest brewer in the US, went into terminal decline and was acquired by rival Stroh in 1982.

Then there are all those IT projects that are allowed to continue, months or years after they should have been abandoned, eating up resources, stealing oxygen from other projects and otherwise miring their host organizations in a swamp of inefficiency.

Why is it that, faced with a failing product or division, organizations so often choose to hang on to grim death? It is the psychology, stupid. Research shows people frequently become overly committed to losing courses of action, throwing good money after bad and expending resources way past the point objective outsiders would consider reasonable because . . . well . . . because they are people.

"A wide range of forces can lead managers and organizations to persist in a failing course of action," noted a 1988 Psychology Today article "Good Money After Bad: Why Do We Become Overly Committed To Losing Projects?" "Not all of these forces are relevant to every case, and not all influence the situation equally. In many instances commitment to a course of action builds slowly, fostered first by psychological and social forces and only later influenced by structural determinants. As forces for commitment accumulate, however, it becomes increasingly difficult for an organization to cut its losses."

In the author's view, the factors contributing to the escalation of commitment to a certain course in organizations can be broken down into four general categories: project, psychological, social and structural. Combined, they promote a tendency to linger too long.

Since escalation can - and very often does - expose corporations to massive losses, escalation dilemmas are a phenomenon that has had the attention of organizational researchers and social psychologists for years. Studies show entire businesses can get locked into seemingly hopeless projects for reasons more psychological than practical. When a company finds itself with a money-losing project on its hands, it must decide whether to throw even more money at it, hoping for a turnaround, or to cut its losses. All too often, organizations have so much emotional baggage vested in existing projects that throwing good money after bad comes to seem like sensible policy.

"The problem with a bad project is that people never bail out when it has just been determined bad, they always keep extending it," says Gil Thew, CEO at Wolken Management Services. "Look at a situation like TrakHealth in Queensland Health: that went on for ages and ages and ages - years - without actually producing anything concrete. And they just kept going through meetings."

Most research and management practice focuses on keeping products and businesses alive, despite exit pressures, notes the Encyclopaedia of Business. The decision to exit has often been viewed as succumbing to failure or "giving up".

"Nevertheless, attitudes towards exiting began to change in the 1960s and 1970s for several reasons," the book states. "Importantly, markets became much more competitive and complex than they had been earlier in the century because of increased production capacity and an increasingly global economy. As a result, more companies began to view exiting as a viable and profitable alternative within their overall corporate strategy. Today, experts advise developing one or more exit strategies in the early stages of a business venture, be it a new product, a new company or a joint venture, so that management can anticipate and recognize warning signs that it may be time to get out."