One of our fave Go To ‘business guys’ on the MilSuccessNet guest writer roster is Jesse Hughes. We like that his point of view is a mash up of his military mindset and on the ground experience with the light infantry with his fresh look at business theory through the added lens of his Economics B.A. and an MBA.(Read his post on his college registration experience here)
His posts for our readers, offer a mix of business theory and practical examples as well as a parallel experience with his military training. (Catch up on his bio here)
Most importantly is that like you, dear reader, he has expectations that have transitioned with him into the civilian world. See if you have some of these same thoughts, and let us know the solutions YOU have would suggest, or scenarious you experienced.
So now, what you need to know and might have been afraid to ask about Sunk Costs, in Jesse Hughes’ own words….
What is Sunk Costs?
A sunk cost is an expenditure that is not recoverable, regardless of future decisions. (Bet that clears things up, huh?)
An example of a sunk cost would be a cover charge at a night club. You pay the upfront fee with the hope that the club will meet your expectations (maybe you’ve been there before, or heard a lot of good things about it, or maybe you just see a lot of attractive people in line in front of you).
Whatever got you to the club and willing to shell out money without seeing the inside contributes to your decision to pay the cover charge.
What happens next is completely separate from your decision to pay the cover charge. The club might be just the scene you expected, or it might be flat, or it could be off the chain. Whatever the situation is when you walk in the door, it might change an hour later. At each point you have a decision to make: stay or leave. Regardless of your decision you will not get a refund of your cover charge, that cost is sunk.
Generally we don’t have a problem understanding sunk costs, our problem is more often than not, recognizing them and acting on them. As in the club cover charge example, if you decide to stay because you paid $40 for the cover charge but the club fails to meet expectations then you didn’t recognize the cover charge as sunk. Your $40 is wasted. It’s gone. You can’t get it back. What you can recover, however, is the time you planned to spend at the club. Walk away from the cover charge and do something else with your time. (Poker players understand this concept all too well; just because you paid the ante does not mean you should play a bad hand. Fold and wait for a better hand in the next deal.)
 Business examples of sunk costs include licensing fees, R&D expenditures, consultant fees, due diligence, proposal expenditures – to name a few.
Ok, so that’s Sunk Costs in my words.
Now for the military connection…….
In theory, the concept of Sunk Costs translates directly into military decisions. For example, regardless of a commander’s plan s/he conducts reconnaissance to confirm or adjust the plan.
If the recon reveals new information (and it always does) then the plan must be adjusted, the inappropriate parts discarded and relevant pieces inserted or updated. Any time spent drafting the plan up to this point is sunk, any irrelevant or inappropriate pieces are also sunk, they are to be discarded. (Yeah, I know, the military cynic in all of us is screaming right now that commanders stick doggedly to their original plan despite information to the contrary, but that is a topic for another discussion. For the purposes of this article ignore the human shortcoming and focus on the doctrine. Thanks.)
Sunk Costs are preached in business as well, but beware, there are assets to consider that often don’t make it into the discussion in the military, specifically human capital and personal brand.
No Kidding …
… There I was in another group meeting /team building opportunity (you can assume I’m rolling my eyes and lacing ‘team building’ with some light sarcasm) in business school.
Of our 6-person team one person was habitually late, and not just by a little bit. We’re talking 10-15 minutes late for a 60-minute meeting. Habitually. The group rotated the responsibility of meeting coordinator and everyone had to find their own way to deal with the tardy member.
Most students simply capitulated and spent the first 15 minutes slow-rolling the meeting and then re-hashing everything when Ms Tardy showed up. Not me.
When it was my turn in the chute, I laid out the ground rules. Punctuality was at the top of the list. My first meeting started on time and Ms Tardy was nowhere in sight. (I published the agenda in advance and put her towards the end to minimize the impact of her poor time management.) True to form, she walked in 15 minutes late and asked for an update. I stated that she could catch up on what she missed after the meeting but that the group was continuing with the meeting as scheduled. That earned me a dirty look from her, and some minor discomfort in some group members.
I took no notice.
When it was Ms T’s turn to present her project to the group she did so but was a bit flustered. At the end of her presentation she proposed a group action. It was met with stiff resistance from the entire group. No one supported her plan. Ms T pushed back saying, “Hey, wait. I put a LOT of effort into this!” To which another group member responded bluntly, “Sunk Cost, time to move on.”
That comment did not go over well and Ms T was visibly upset by it. As the meeting coordinator I moved us on to the next agenda item, we were running out of time by this point. That put me in Ms T’s crosshairs.
Normally I wouldn’t have cared. (If you show up late to my meeting and ask for special treatment I’ll hand you your ass. It’s pretty simple.) However, Ms Tardy made every meeting difficult after that.
It was a painful semester for our group but it got me thinking about that interaction and what I could have done differently to better control the outcome. There are a number of lessons learned from this experience, but I’ll focus on three:
1. Sunk Cost
2. Business Objectives
3. More Sunk Costs
Link to the lessons in part 2 and one book which bridged the long game of survive and thrive for Jesse’s journey from military to civilian turf.
About the author
Jesse Hughes served in the US Army Light Infantry until 2002. He has a BA in Economics and an MBA from the University of Chicago. He provides Strategy Consulting to commercial and federal clients. A Bears fan, he’s still willing to acknowledge that he has a softer side; that side which enjoys long walks on the beach at sunset.