4232019 knowing When to Pull the Plug DECISION MAKING Knowing When to Pull the Plug by Barry M. Staw and Jerry Ross FROM THE MARCH 1987 ISSU ast year you authorized the expenditure of $500,000 for what you thought was a promising new project for the company. So far, the results have been disappointing. The people running the project say that with an additional $300,000 they can turn things around. Without extra funding, they cry, there is little hope. Do you spend the extra money and risk further losses, or do you cut off the project and accept the half-million-dollar write-off? Managers face such quandaries daily. They range from developing and placing employees to choosing plant sites and making important strategic moves. Additional investment could either remedy the situation or lead to greater loss. In many situations, a decision to persevere only escalates the risks, and good management consists of knowing when to pull the plug. ‘These escalation situations are trouble. Most of us can think of times when we should have bailed out of a course of action. The Lockheed L 1011 fiasco and the Washington Public Supply System debacle (commonly referred to as WHOOPS) are spectacular examples of organizational failure to do. so. Decisions to persist with these crippled ventures caused enormous losses. Of course, all managers will make some mistakes and stick with some decisions longer than they ought to. Recent research has shown, however, that the tendency to pursue a failing course of action is not a random thing. Indeed, at times some managers, and even entire organizations, seem almost programmed to follow a dying cause.?What leads executives to act so foolishly? Are they people who should never have been selected for responsible positions? Are these organizations simply inept? Or are they generally competent managers and companies that find themselves drawn into decisional quicksand, with many forces driving them deeper? Though we think this last description is probably the right one, we don’t think the tendency is uncheckable. Managers and organizations that often fall into escalation traps can take steps to avoid them. Why Projects Go Out of Control Asa start to understanding why people get locked into losing courses of action, let’s look first at what a purely rational decision-making approach would be. Consider, for example, the decision to pursue or scuttle an R&D or a marketing project. On the basis of future prospects, you'd have made the initial decision to pursue the project, and enough time would have passed to see how things were going. Ideally, you'd then reassess the situation and decide on future action, If you were following a fully rational approach, whatever losses might have occurred before this decision point would be irrelevant for your reassessment. With a cold, clear eye, you'd view the prospects for the future as well as your available options. Would the company be better off if it got out, continued with the project, or decided to invest more resources in it? You’d treat any previous expenses or losses as sunk costs, things that had happened in the past, not to be considered when you viewed the future. In theory, pure rationality is great, but how many managers and organizations actually follow it? Not many. Instead, several factors encourage decision makers to become locked into losing courses of action. The Project Itself The first set of factors have to do with the project itself. “Is the project not doing well because we omitted an important factor from our calculations, or are we simply experiencing the downside of problems that we knew could occur?” “Are the problems temporary ‘bad weather or a soon-to-be- settled supplier strike’ or more permanent ‘a steep downturn in demand?” Expected or short-term problems are likely to encourage you to continue a project. You may even view them as necessary costs or investments for achieving large, long-term gains. If you expect problems to arise, when they do, they may convince you that things are going as planned.A project’s salvage value and closing costs can also impede withdrawal. An executive could simply terminate an ineffective advertising campaign in midstream, but stopping work on a half-completed facility is another story. A project that has very little salvage value and high closing costs—payments to terminated employees, penalties for breached contracts, and losses from the closing of facilities— will be much more difficult to abandon than a project in which expenditures are recoverable and exit is easy. It’s understandable why so many financially questionable construction projects are pursued beyond what seems to be a rational point of withdrawal.” Consider the Deep Tunnel project in Chicago, a plan to make a major addition to the city’s sewer system that will eventually improve its capacity to handle major storms. Although the project has absorbed millions of dollars, it won’t deliver any benefits until the entire new system is completed. Unfortunately, as each year passes, the expected date of completion recedes into the future while the bill for work to be finished grows exponentially. Of course, no one would have advocated the project if the true costs had been known at the outset. Yet, once begun, few have argued to kill the project. ‘The problem is that the project was structured in ways that ensured commitment. First, the project managers viewed each setback as a temporary situation that was correctable over time with more money. Second, they perceived all moneys spent as investments toward a large payoff they'd reap when the project was complete. Third, expenditures were irretrievable: the laid pipe in the ground has no value unless the entire project is completed, and it would probably cost more to take the pipe out of the ground than it’s worth. Thus, like many other large construction and R&D projects, investors in the Deep Tunnel have been trapped in the course of action. Even though what they receive in the end may not measure up to the cost of attaining it, they have to hang on until the end if they hope to recoup any of their investment. Managers’ Motivations Most of the factors concerning projects that discourage hanging on are evident to managers. They may not fully factor closing costs and salvage value into their initial decisions to pursue certain courses of action (since new ventures are supposed to succeed rather than fail), but when deciding whether to continue a project or not, executives are usually aware of these factors. Less obvious to managers, however, are the psychological factors that influence the way information about courses of action are gathered, interpreted, and acted on.