Understanding the Sunk Cost Fallacy in Digital Transformation

Summary

It’s often quoted that 70% of all digital transformations fail. But what about those organizations that know they are heading down the path to failure, but are reluctant to turn back due to the time and effort they’ve put in and an inability to recognise their shortcomings? In this feature, Sam Dunscombe, Head of Growth at digital BSS provider Mobilise, explores the sunk cost fallacy in relation to digital transformation.
 
Most established businesses have a solid IT infrastructure in place. But while the infrastructure does the job, it relies on legacy systems that are outdated, clunky and unable to integrate with more recent innovations. Admitting when it’s time to change? That’s a common challenge, known as the sunk cost fallacy.

 
Introducing the sunk cost fallacy

The sunk cost fallacy is a natural tendency to continue implementing a strategy because an organization has invested in it, even when it’s clear that abandoning it and taking a different course would be more beneficial. Sunk costs — those that have already been incurred and can’t be recovered — are often to heavily taken into consideration when making business decisions. This commonly results in a block on investment into new technology or digital transformation as the process and solutions that are currently in place and have been invested in. While not fit for future purpose, they adequately fulfil the immediate needs of the business.
 
But it’s when organizations start considering their sunk costs when determining strategy that irrational decision-making—the sunk cost fallacy—comes into play. The sunk cost fallacy is something that is typically an issue for more established companies with significant legacy infrastructure and technology that has underpinned their core processes for a long time.
 
There are several reasons why businesses fall victim to sunk cost fallacy. First, there is a perception that undoing old projects and integrating a new digital transformation plan to sit alongside all of this legacy complexity will take too long and cost too much. Additionally, it’s commonly perceived that the commercial benefits of making such a large, strategic change will take too long to realise and are too hard to quantify to make it worth the effort. Additionally, on an individual level, people naturally find it difficult to accept loss in any form and prefer to follow their decisions through, even when failure is inevitable.
 

A short-term fix

Despite this, there’s a growing number of applications where taking a different course of action is unavoidable. It might be an individual project, or one business area that desperately needs a quick fix to their digital needs. Short-term trading, the drive to maintain a competitive edge and the need to respond to market conditions mean that most organizations tend to opt for the fastest solution, which is to implement a new singular proposition or project in silo with existing infrastructure.
 
While this fixes the imminent issue, it doesn’t support the organizations’ long-term technological development. Siloed systems aren’t something to shout about either—they prevent overall visibility of a business’ data and activity, and arguably create an even more complex, entangled system than the original legacy system that was in desperate need of an upgrade.
 
While the sunk cost fallacy is a problem that all organizations face, it is particularly pertinent in telecoms, where established service providers (SPs) implemented a system ten or 20 years ago and are unwilling to let it go. It’s also common that, despite being new to market, hyper agile and successful in their own industry, a business faces hurdles when it wants to move into a vertical or offer a different suite of services.
 

Short-term pain, long-term gain

It’s clear that in the long term, the ideal solution is to transform the technology stack into a digital, agile platform that has the capability to make quick changes, add new functionalities and react to market fluctuations. But the sunk cost fallacy is preventing SPs from making this switch.
 
There’s also an added layer of complexity pertinent in telecoms too, in that established SPs have a longstanding tendency to keep all of their technological development in house. While this strategy worked ten years ago, it’s no longer fit for purpose. Across any industry, the businesses that are disrupting the market are those partnering with external experts.
 
According to Equinix, 62% of IT decision makers globally cite a shortage of talent as a principle threat to their business’ success. There simply isn’t enough talent for each SP to have its own in-house team implement a successful digital transformation. Additionally, the expertise of an in-house team will never contend with the expertise of a partner, that specialises in and has the experience in supporting several SPs to do the same thing.
 
In order to untangle the web that legacy systems often create, organizations need a sophisticated platform that either replaces the old system or sits on top of it as an additional layer and makes sense of the chaos below. Mobilise’s orchestration layer, which is part of its HERO platform, does exactly this.
 
HERO is a flexible plug-and-play digital BSS platform that can be integrated into any system to offer a seamless, fully digital interface. Fully compliant with the TM Forum Open API Specifications, there are over 60 APIs that can be integrated into the front and back-end systems for functions including self-service, eSIM provisioning, payments, in-app push notifications, marketplace for cross selling and user profiles maintenance. The orchestration layer sits in between HERO and the legacy system and ensures every integration is fast, smooth and secure.
 
Mobilise leads by example, by recognising when some functionalities fall outside of its realm of expertise. It partners with experts in know your customer (KYC), billing and rating, Subscription Manager Data Preparation+ (SM-DP+) to bring a fully digital, agile and quality service to customers looking to digitally transform their telco business or business area.
 
Partnering with a digital-first business offers additional value for organizations too. Mobilise consults on the challenges that those using legacy systems face across several industries, with several individual organizations, and are able to develop the orchestration layer based on feedback from these interactions. The result is a continuously improving platform that provide a seamless experience that is directly catered to the needs of its users.
 
The truth is that sunk cost fallacy is part of human nature. But just because it’s natural, doesn’t mean it’s the right thing to do. Changing course when a better option appears is the key to success. And for digital transformation and new technology adoption, this involves admitting when you’re out of your depth in-house and partnering with an expert to guide you to success.
 
Mobilise’s orchestration layer is part of its plug-and-play solution HERO—a white-label SaaS solution to support businesses in telecoms and beyond to offer connectivity to customers.