An irrational commitment to a failing course of action – how to be the smartest person in the room
WARNING: this is not a story about giving up, it is a story about being smart and having strength.
Many boards, executives, owners, managers and businesses suffer, at some time, from the irrational commitment to a failing course of action paradigm.
An all too common story?
When we set out on a project, an initiative, a new business unit, an investment, a new mine, a new clinic, a JV (and the list goes on) we plan for success and we hope for success. We invest capital, effort, time, sweat and tears (and the list goes on) to make our venture a success.
Then we invest more (refer to the list above) to ensure our venture is a success. Then something goes wrong and we invest more to ensure our efforts are not in vain.
We then have to update our board, executives, managers and owners. Because we are still committed to making our venture a success, we remain upbeat about the venture and stakeholders then buy into the success of the venture.
Then something else goes wrong. It may not be terminal, but it does require more investment and because we are still committed to making this venture a success, the cycle continues.
Circumstances change but not our responses
Economic conditions change, customer preferences change, resource demands change and the initiative is struggling but we keep on marching, committed to success.
Boards, executives, business owners, project sponsors and project managers all remain committed. They authorise and commit the resources required to deliver the venture because we all believe we are heading for success.
But somewhere in all this noise, the venture is costing more and more and success is disappearing into the distance. We continue to commit more capital and effort because this venture is going to be a success, it has to be. We cannot imagine, or more importantly tell anyone, that it is not working, so we reinforce the fact that it has to be a success and we convince ourselves (and everyone else) to keep going.
Our venture is over budget, behind schedule, it is dragging our profits down and is distracting us from our business and its success.
At no time did we ever ask ourselves – should we put a stop to this?”
Today we are rewarded for all our efforts by our smart phones, smart watches and fitness devices for meeting our step, stand and exercise goals. Here is another award, our certificate for an ‘Irrational commitment to a failing course of action’.
The challenge for many is answering the question – how, after committing so much capital, time and energy into an initiative can we justify stopping it?
Some years ago, Fortescue Metals launched the Olympic Dam Project. At the time the project started, everything aligned to make the project viable.
Fortescue had invested heavily but economic conditions were changing and the project’s viability was not looking good. After investing A$20 billion, Fortescue made a brave decision to stop pumping capital into the project and to shelve it.
The following year, Fortescue announced a 53% increase in profit. The market reacted well and the decision was lauded by many as a tough, but smart and correct decision.
A number of years later, economic conditions changed (as they always do) and Fortescue saw an opportunity to resurrect the project. The rest is history. Olympic Dam was completed and has been a profitable venture for Fortescue and its investors.
Imagine making a decision to abandon a marquee project after having invested A$20 billion.
The trap in the irrational commitment to a failing course of action is a deep one. It is referred to irrational because it is not rational to keep investing in something which is failing. Yet many organisations do it because stakeholders are expecting, sometimes demanding, success.
There is no simple explanation for why rational people struggle to make smart decisions about a failing course of action, but there are mechanisms that can be implemented to help guide and enable decision making.
Talk to us about how i3 Australia can help with capital management, portfolio management, project management and governance all which play an important role in ensuring that the irrational commitment to a failing course of action trap is avoided.