You have probably already witnessed this particularly tricky situation: your company has launched a costly project amid a flurry of sweeping announcements, it has officially made it part of the strategy and invested considerable resources and energy but unfortunately, after a while, it becomes clear that the project is a failure. The expected results are not achieved and the operation’s financial equation is turning dangerously negative. The rational thing to do would be to abandon the project, salvage what can still be used elsewhere, and change plans accordingly.
However, all too often decision-makers are reluctant to change course: the project must be given time to prove its worth, it would be premature to kill it off before it has had a chance to really take off, and above all, if we stop now, everything we have invested will have been wasted, whereas pressing on is the only hope we have of proving that we were right. To try to turn things around, some companies will invest even more! The result is that the company continues the project not because it has succeeded, but because it has failed…
“Few things are more damaging to a decision-maker’s reputation than publicly reneging on a decision.”
Conceptualised by University of California, Berkeley Professor Barry Staw, this dangerous phenomenon called escalation of commitment can wreak havoc in many organisations.
Few things are more damaging to a decision-maker’s reputation than publicly reneging on a decision. Furthermore, keeping people onside when you change your mind is often riskier than standing your ground. Psychologically, it is more rewarding to keep running towards a wall, telling yourself that you will eventually break through it, than to be seen as an inconsistent and potentially untrustworthy weathervane.
Some of the most famous examples of escalation of commitment include the Shoreham nuclear power plant in New York state, which operated for less than four years after 11 years of construction, or movie Cleopatra – which ended up costing 22 times its original $2 million budget.
What can you do to avoid escalation of commitment? Paradoxically, one attractive solution is to make another commitment: to stop if you fail. More specifically, before embarking on any project, you should ensure that you state publicly what the maximum acceptable loss – a military euphemism also known as acceptable damage or acceptable casualties – is.
By setting an upper limit on the risk you are willing to accept, and by being public about it, you limit the likelihood of being accused of inconsistency. It is important not to let yourself get caught up in your own involvement in the project, and to be able to stick to this second commitment to abandon it once a certain limit has been reached.
In short, if you stick to the maximum acceptable loss you have set, you protect yourself from drifting away from your commitment: before making any major decision, determine how far you can go.
This was previously published in French by Xerfi Canal.
This post gives the views of its author, not the position of ESCP Business School.