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Monitoring ROI during projects - Beware the Concorde Fallacy

Monitoring ROI during a project

The Concorde airliner project was a revolutionary international collaboration in the 1960s between the French aerospace manufacturer Aérospatiale and the British Aircraft Corporation. The team was able to design and manufacture a Supersonic passenger jet. A total of twenty aircraft were built, including six prototypes and development aircraft. It had a maximum speed over twice the speed of sound at Mach 2.04 (1,354 mph or 2,180 km/h at cruise altitude), more than twice the speed of conventional aircraft. The aircraft is regarded by many as an aviation icon and an engineering marvel.

However, the Concorde was very costly to produce and suffered some major marketing problems. While it had initially held a great deal of customer interest, the project was hit by a large number of setbacks and order cancellations. Even though it was apparent there was no way this machine would make anybody any money, the UK and France kept investing deeper and deeper on the grounds that they had already invested a lot of money.

In 1976, the year that Concorde went into service, Dr. Richard Dawkins, the Oxford University zoologist already noted for minting the term “selfish gene”, dreamt up another catchy phrase, the “Concorde Fallacy”. Concorde Fallacy describes behaviour in which creatures persist with an activity into which they have invested a lot of time and energy.

The Concorde was successful enough to fly as a small luxury fleet from 1976 until 2003, for the most part profitable for the niche transatlantic market. As these advanced supersonic aircraft became some of the oldest airframes in the fleet, operating profits eventually fell, due to rising maintenance costs and changing market conditions.

The trap of sunk costs

In economics, the sunk cost fallacy involves valuing a project based on how much you’ve already invested, its sunk costs, rather than on the present value of its future returns minus the present value of its future costs. If its net present value is negative, you should cancel it, regardless of how much you’ve already spent. Only future costs and benefits should be relevant to present decisions.

Yet, from the Concorde jet to the Iraq War, people constantly fall into the error of reasoning from sunk costs. What’s more, people are really convinced by these arguments. Inexperienced gamblers often fall into this trap: “Sure, the house took me the last 10 hands in a row, but if I get up now, I’ll have lost everything! I’ve got to get it back!” We tend think of money we’ve already lost as being “still on the table,” and if only we raise the stakes, we could get it back.

Four centuries before Concorde, in Part One of “Henry IV,” Shakespeare’s Falstaff expressed it this way: “The better part of valour is discretion.”

Lessons learned on project costs & benefits

Here are 3 lessons we can learn from the Concorde Fallacy:

  1. We should make go/no go decisions based on incremental costs and benefits. Prior investments, which cannot be recovered, represent sunk costs and should not be relevant. Wasting more resources does not mitigate the waste to date. However, it might be sensible to continue if additional investment can reduce the overall loss, increasing the ROI.
  2. The project sponsor must periodically re-evaluate the ROI on the project. Circumstances change – costs may have escalated, the demand for the product may have diminished, some other competitor has just launched a better product, etc. Responsibility for this lies with the sponsor, not the project team.
  3. The kill decision needs good information, careful analysis, clear thinking and a degree of courage to act on the available data. Unfortunately this type of decision is not always based on rational thinking; emotions and biases can cloud our vision.

Keep monitoring project ROI during execution

During a project, keep re-evaluating the business case to monitor the ROI. If you do stop the project, you need to prepare a cancellation plan with an extensive checklist of activities required to smoothly accomplish ramp down and close out. The plan should explain why, how and when the project is to be cancelled.

Killing a project does not need to be a complete loss. It can be easier to hit the stop switch if you have a post-project review  that captures whatever valuable data or lessons learned for future projects, or for any potential project revitalisation when conditions turn favourable once more.

To quote a 2005 KPMG Global IT Management Survey: Cancelling a project unlikely to deliver expected benefits should not be seen as a failure — failing to cancel such a project should be.

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