Don't let the sunk cost fallacy trap you into outdated technology
We’ve all likely fallen victim to the sunk cost fallacy at one time or another. Perhaps we have continued to watch a movie we hated all the way to the end because we already paid for the cinema ticket. Or we’ve plowed on with a book we're not enjoying because of the time we've already spent reading it. The ‘bygones principle’ in economics tells us that past costs should have no impact on our decisions, and we should only take future costs into account, or else we are falling victim to the sunk costs fallacy. So that movie you’re not enjoying? Forget the $10 movie ticket and instead think about the time you’ll gain to do something else, or the parking fees you’ll save by leaving immediately.
And yet, human beings being the interesting creatures we are, the greater the sunk costs, the greater the impact it seems to have on even the most rational, business-minded people. Deciding whether to abandon a $10 movie ticket and an hour or so of your time is one thing. But what about something as complex and costly as replacing the technology that you use to run your business?
All that time and money spent on hardware, consultants, integrations, user licenses, training, and more – all down the drain if you switch suppliers. This surely must be taken into consideration. Better to bite the bullet and do what needs to be done to continue working with your existing suppliers, even if that includes the pain of repeated future technology conversion projects and costs. Not true. The sunk cost principle tells us these past costs must be disregarded. Assuming that the replacement product quality is equal or better, if the cost of the new provider/product over the future period is lower than the cost of the current provider/product over the same period, you should switch no matter how much you spent in the past. Note: “cost” has to include both tangible costs (integrations, people time, future forced migrations) and intangible costs (productivity, employee happiness/retention, and contractual differences in the vendor contracts).
Think of it in a simple example: an old car. The cost to keep it on the road may be more than its true value. But just the fact that in the past you have spent a lot of money on it, and repairing it, does not make it valuable in the future.
Pre-cloud computing technology conversions
It's not surprising that companies see technology conversions in the pre-cloud world as something to dread. Overhauls of tech stacks, including hardware, software, and integrations can take years, cost millions, monopolize staff resources and distract a company from its core objectives. This is especially unwelcome if a supplier is forcing the technology conversion onto its clients.
The occasion of a technology conversion IS IN FACT a natural opportunity to review suppliers.
Differences with Cloud Native Systems
Unlike pre-cloud systems, with Cloud Native systems, tech onboarding and upgrades are much easier. SaaS products are built to allow for rapid onboarding of clients and constant functionality and technology upgrades. You are always immediately on the latest version of the service without doing anything. The quick explanation is that your supplier takes care of all the behind-the-scenes stuff that needs to happen, and you simply carry on accessing the updated service. Read our primer on cloud computing for more.
Pre-cloud Products Transitioning to Cloud Products
Some pre-cloud technology suppliers are slowly transitioning to cloud computing-based services. For these suppliers, tech conversions are necessary to move you from an on-premise version (pre-cloud) to a cloud-native version. These conversions from on-prem to cloud tend to be complex and difficult technology conversions.
Unfortunately, many times it is even worse if your supplier has taken a phased approach in their migration to the cloud. Perhaps, instead of rebuilding their technology from scratch, they've decided to put a “wrapper” around it to allow remote access through Citrix or other Remote Desktop providers and called it the cloud. This “cloud-washed” option (see our article on cloud washing) inevitably results in a messy conversion. You don’t get the simplicity of true cloud, and to add insult to injury you are likely to go through another technology conversion in two to three years’ time when the supplier finishes upgrading to the cloud and forces you to migrate again to their then finally cloud-native service.
Where does that leave us with regard to the sunk cost fallacy? First, the principle holds true: holding future cloud-based business benefits hostage because of the time and money spent on legacy technology will end up costing your business more in the long term. At the very least, use the occasion of an upcoming technology conversion as an opportunity to consider alternatives to your current supplier, especially if they are not yet bringing you true cloud services today.
One should consider – if you have to convert to the cloud either way - Do you convert to the cloud with your current provider, or is it an opportunity to make a change since you have to change anyway?
About Rockport VAL
Rockport VAL is the long-awaited market alternative. Rockport VAL provides CRE Valuation and Discounted Cashflows. VAL is user-friendly, affordable, powerful, and connects easily to your tech ecosystem. It’s Cloud Native (it was created in the cloud), so there’s no cloud washing here, just the simplicity and advantages of cloud computing.