Everyone is familiar with the phrase “Winners never quit and quitters never win.” (BTW, this quote is not originally form Coach Vince Lombardi as many believe. Rather it comes from a 1937 self-help book from Napoleon Hill named “Think and Grow Rich.” Today people believe that phrase to be an absolute truth. But like most absolute truths, it is fatally flawed. In fact there is an equally good argument to the phrase, “Quitters also can be winners.” Okay, this is not going to be one of those stories where all of the players on the losing team also get trophies. I hate that. I would never recommend that. However, what I do want to talk about is knowing when to quit.
First, quitting is a time-honored practice when you know there is no chance to win. It could be argued that soldiers in battle who surrender rather than fighting until the end (which usually means their end) at least live another day. That is contrary to the Klingon believe that, “Today is a good day to die.” Another example is resigning in a chess match when it becomes apparent that there is no way you can win against your opponent. People also resign or quit jobs because of a variety of reasons ranging from not liking their new managers or a new corporate policy to having to deal with family issues. But I’m not going into those issues of quitting either.
What I want to talk about is quitting for economic reasons. Specifically, I want to talk about the economic concepts of sunk costs and opportunity costs. Let’s first get the definitions straight. A sunk cost is money spent on a project that cannot be recovered. To that extent, if there is any salvage value to a project that could potentially be cancelled, that salvage value can be credited against the sunk cost reducing the loss. Opportunity cost is the cost of not doing something else with the project resources that might yield great returns that you instead continue to spend on the current project.
But how should you determine whether a project should be failed? One method looks at all future costs and potential revenues. If brought back to present value dollars using some reasonable rate of return the project results in a loss or a negative number, the project should be discontinued immediately.
On the other hand, even if a project has a positive rate of return, if an alternate project using those same resources or a project designed to meet the same goal has a greater net present value, you still would be better cancelling the current project and pursuing the alternate project.
Note that neither of these methods look back at sunk costs. Does this mean that you should always ignore sunk costs? No. You only ignore sunk costs when determining whether to cancel a project or continue it, not to compare it to alternatives. However, huge sunk costs may reveal a problem in the way you initially evaluate projects, perhaps being overly optimistic in those early estimates underestimating costs or overestimating benefits.
In any case, you want to catch and fail projects that do not live up to their initial expectations or new alternatives as fast as possible. In fact, there is a saying among the most innovative companies, “Fail often but fail fast.” You will never fail if you do not try new things, new projects, new ideas. You want to have lots of ideas or projects because some of them may be wildly successful. However, don’t get so bogged down in sunk costs for a project that you fail to fail a project quickly that is showing signs of failure.
Therefore, quitting may release resources that can be better applied to something else that could be a success. This concept can be applied equally in the workplace and in your personal life. Is there anything you should quit so you have more time to do something else that might be successful?
C’ya next time for more SSAS fun.