are sunk costs impacting your decision making

Are sunk costs impacting your decision making?

Years ago, a customer of a company I worked for halted their capital spending program. The entire program, no matter how far along the construction was. Some facilities were more than 80% complete. And the amount of capital spent was in the billions. The market collapsed and no longer supported new capacity coming online. So they just stopped.

It was an amazing decision. But it was the right one for them. From that point on, they would have been throwing good money after bad. It takes guts to walk away from that much invested capital. But it was a sunk cost.

Whether it is time or money spent, once the resource is spent it is a sunk cost. Sunk costs are anchors that drive bad decisions. How often do sunk costs impact your decision making?

one ah **** wipes out ten atta boys

One “Ah ****” Wipes Out Ten “Atta Boys”

He sat there rocking back and forth like he was in a rocking chair.  Hands folded over his belly, thumbs twiddling as he talked.  You could tell by looking at him he had been around the block several times—it wasn’t just the years on his face, it was the calm, but knowing air about him.

“One Ah **** wipes out ten Atta Boys” he said

The comment was simple, but profound. We were talking about risk management and the impact on reputation. When something goes really wrong, it wipes out your credibility and all of the good things you’ve done before. And if you get a second chance, it takes a long time to come back to the status you held before.

How do you make sure you are thinking about risk early? And how do you make sure you don’t have one bad moment that wipes out ten good ones?

what happened to the barf bag?

What happened to the barf bag?

The flight was relatively smooth and uneventful. So it was a surprise when five people got sick. The flight attendants scrambled to get plastic bags and paper towels to clean up the mess. One of them remarked to me that he felt badly for the people, but was surprised since there was no turbulence. The incident left me thinking it has been some time since I saw the bag in the seat pocket. I checked, and sure enough, there was nothing there. The thing is, the bag isn’t needed most of the time. But when it is needed, it is needed immediately.

In business, there are tools put into place to mitigate risks. But if you take away those tools, you may find a little mess becomes a big mess. Just like turbulence and people getting sick can be predicted, you have situations in your business that can be too. What can you do to put tools in place to mitigate the mess before it happens?

you can't skip the basics

Not knowing the basics can lead to big problems down the road

After dance class last week, a few of us gathered to talk for a few minutes. We had noticed a few of the people in class didn’t know the basics and thought it would be helpful for the instructor to cover them next time. You learn the basics when you are younger, so as an adult, they are not normally taught. But if you come into class without having taken dance earlier in life, you don’t know what you don’t know.

The same is true in business. At one point in my career, I spent a lot of time looking at why some projects fail while others are wildly successful. One of the key findings was people. When people were put in a position to run a project and didn’t have the basics, the projects failed. You can’t skip the basics. How are you making sure your people are getting them?

Are you taking into account predictable changes in your forecast?

expect predictable changesI was getting ready to head north to Seattle. The drive time according to GPS was 2.5 hours. That might have been the case at the moment, but many times the traffic clogs up around mid day. By the time I was nearing Seattle, surely I would hit traffic that GPS wasn’t forecasting. And I did. It added about an extra hour to the drive. Good thing I planned for it, as I would have missed my first appointment had I not.

In business, there are many situations that are known, but don’t always show up in the tools you are using to plan for the future. It could be seasonality or cyclicality in your business. If you take your current month or annual sales and project them forward, you are likely to miss your projections all together. This happens more than you would expect. How are you taking predictable changes into how you run your business?

 

Is it time to step on the gas?

know when it is time to push on the gasHave you ever noticed cars slow down going up hills or to the top of a bridge? Once the peak has been reached, traffic speeds up and gets back to speed limit drives. This happens because the gas is not applied a bit more to maintain speed going uphill.

Headwinds can be experienced in business in the form of choppy market conditions, new competitors, supply chain disruptions, etc. Businesses that excel step on the gas. They figure out how to move faster. By doing so, they are way out ahead of the competition when the market conditions ease. How are you making sure you step on the gas at the right time?

History repeats itself

history repeats itselfHave you ever heard this situation? A company makes changes to its strategy and people development plans to grow, only to find it is stumbling significantly after the changes are made. This exact situation came to light in a conversation recently. A few decades ago, the company underwent an initiative to address cyclicality in its business, leading it to change its strategy and expand its offerings to minimize the impact of the cyclicality. It also undertook a deliberate effort to match the right people to the right position to minimize risk in the business and grow skillsets.

Years later, the company backed out of the newly expanded offerings. The cyclical part of the business was doing extremely well at the time and the newly expanded offerings were not quite as profitable, so resources were reallocated. And to meet the needs of the business, people were promoted more quickly and did not have the full skillsets. As a result, the company found itself in the same spot it was a few decades before. The history lessons had not transferred between generations of leadership. How are you making sure history does not repeat itself in your business?

Are your actions creating a hazard?

are your actions creating a hazardIt is summer in the Portland area. The views are stunning—snow capped volcanoes that sit atop mountain ranges, green rolling hills and winding rivers that surround the city. The many bridges provide for a brief, but spectacular view that is unmatched. And that can be distracting for some drivers new to the area, or just visiting for the summer. Yesterday was a prime example. A driver proceeding well below the speed limit suddenly pulled over to the shoulder and stopped to observe the view. His actions created a hazard, unbeknownst to him, as he was distracted from accomplishing his task of driving safely.

Distractions in the workplace have a variety of impacts on the business. It could be as simple as lower productivity. But it could be a serious as someone getting hurt or killed. Many times, the distracted person is not the one who gets hurt. It is someone else that is nearby. How are you creating a distraction free culture?

Are You Good or Lucky?

Are you good or lucky?Do you ever drive down the freeway and see people driving at 60 miles per hour or more with less than three car lengths ahead of them? Not a day goes by that I don’t see this many times over. And, there are typically a number of people driving in blind spots. It is surprising that there aren’t more accidents. The reality is, there is not enough room to stop at that speed and that distance should the need arise. The drivers are lucky, not good. But, they think they are good drivers due to the absence of accidents.

Do you have this situation in your business? Is the measure of success the lack of something bad happening? If so, it is time to take a step back and look at the risk factors in your business. High performing companies know their risk factors and they know the levers in the business to pull at the appropriate times. Their measures of success are positive measures of their performance. How are you making sure you are good, not lucky.

What are your red flags?

what are your red flags?It has been raining pretty significantly for days. I didn’t notice it at first because it was dark and due to the amount of runoff in the hilly areas heading to the storm drains. After days of walking by, something didn’t seem right, so I took a closer look. And there it was – probably a broken pipe at the sprinkler irrigation box with significant quantities of water literally heading down the drain. The house was on the corner – it’s front door and driveway on one street and the leak on the other. It’s a house I walk past daily and is a few miles from home, so I don’t know the people. After knocking on their door and three others, I finally found someone home to alert. It’s likely the people are out of town. A few more days passed and a few calls to the water department, the issue was addressed. But the water keeps flowing. They will be facing a massive water bill and huge amounts of wasted water. Clearly there was no mechanism to alert the city or the people to the problem.

Many businesses face similar issues around leakage. They may arise in areas with low visibility. Without a mechanism to alert you to the issue, it can go unchecked for quite some time, resulting in a big surprise. Other times, it may be noticed, but unresolved because the people don’t have an avenue to resolve it. The challenge is to keep ahead of it and address the root cause before it becomes significant. Do you have warning systems in place that alert you to issues in your business? And if you do, do the people have a mechanism to resolve the issue before it becomes significant?