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Avoid Sunken Cost Fallacy with New Cloud Tech

April 7, 2020

Blog
Author
Maarten Rikken Maarten Rikken
Maarten Rikken is a Senior Solutions and Product Marketing Specialist in the SAP Digital Strategy Team.

Anyone who's ever overeaten at a buffet to get their money's worth, gone to a concert when they had the flu just because they'd already bought tickets, or continued watching a terrible movie, has committed the sunk cost fallacy.

 

What is the Sunken Cost Fallacy?

The concept of a sunk cost comes from our tendency to continue doing something if we've invested time, money, or any other resource into it. This concept becomes a fallacy if it drives us to keep doing this thing even if it's making us unhappy or harming us. In business, a sunk cost is anything that has been paid for and can't be recovered.

For example, an organization may have invested a million dollars into a new data management solution. This money is now gone and won't come back. If the solution is no longer helping the business, its cost shouldn't figure into the business's future decision-making process. Data is one of the most precious resources a company has, so extracting value from it should be a top priority. It doesn't matter what you've done before; if it isn't helping you get value from your data, it needs to change.

 

Data Management and the Sunken Cost Fallacy

Traditionally, data management has been on-premise. Data hosted on-prem requires hardware to be set up on a company's or their vendor's premises. This local setup and installation mean that on-prem data management usually comes with a high upfront cost. Companies also had to invest time and money to understand their storage requirements before setting everything up. If they miscalculated their storage and computing resources requirements, it could be quite costly to upgrade later on. Also, the responsibility to maintain the system and keep everything running falls on the company.

All of these costs mean that most companies with on-prem data management installments have invested heavily in their solution and are primed to commit the sunk cost fallacy. Now, to be clear, there's nothing wrong with on-premise data management, and for many industries, like banks, on-prem data management is a legal requirement. On-prem also provides companies with complete end-to-end ownership over their security and compliance with data legislation. But if on-prem isn't a legal requirement and it isn't helping you extract value from your data, you shouldn't continue investing in it just because you paid that upfront cost. Any investment that is no longer helping your business should be scrutinized, regardless of its cost.

 

Investing in Cloud Technology

Cloud computing, which means the delivery of computing services, like databases or software, over the internet has a few advantages over on-prem (read more here Cloud or On-prem). When it comes to data management, the cloud gives you the elasticity to distribute computing resources efficiently to save money. If your computing or storage needs change, the cloud can be quickly scaled up, down, or even suspended. Cloud computing also gives your employees the flexibility to access corporate data via smartphones and devices.

It also has no setup cost. Most of the time, your service provider (for example, SAP) will host your cloud computing and storage, so you will just need to buy a license for your employees and set up their accounts. There's no upfront cost involved, and maintenance of the system is your provider's responsibility. The different cost structures between on-prem and cloud solutions make the former a capital expenditure (an investment upfront), and the cloud an operating expense (ongoing subscription cost).

In an ideal world, companies wouldn't let emotional or financial investments affect their future decisions. However, detaching yourself from prior investments is easier said than done because the more we invest in something, the harder it becomes to abandon it. In "Thinking, Fast and Slow," Daniel Kahneman argues that organisms who prioritized avoiding threats were more likely to pass on their genes than if they were looking to maximizing opportunities. Preventing a loss is a more powerful driver than the prospect of making a profit.

 

Avoiding the Sunken Cost Fallacy

The best thing is, when it comes to moving your on-prem data strategy to the cloud, you don't actually have to abandon anything. For companies that are not ready to move all their data to the cloud, or have running investments in the on-prem infrastructure, there's the hybrid cloud. The hybrid cloud is a mix of cloud solutions, as well as on-prem hardware. SAP on-prem solutions like SAP BW/4 HANA are easy to extend to the cloud with cloud offerings like SAP Data Warehouse Cloud and SAP HANA Cloud. Running a hybrid data management system lets you divide your data any way you choose between the cloud and on-prem.