How to let go

One of the biggest executive headaches is to hang on to an ailing part of the business for far too long, thereby racking up massive costs. Eventually, if it is rotten, it will have to be sold off or closed down. Far better to do so as early as you possibly can.

by The McKinseyQuarterly
Last Updated: 23 Jul 2013

GM, for example, threw billions of dollars into a 20 year black hole because they chose to stick with the doomed small-car Saturn brand.

New research has suggested four decision biases which make managers hang on for far too long to a failing project. These are: the confirmation bias where people tend to seek information that supports their predetermined view and to disallow information that does not; the sunk-cost fallacy which makes executives unwilling to give up on something that has already eaten up funds; and directly related to this is the third bias, the escalation of commitment. This refers to the impulse to throw more money at a bad investment to justify the costs incurred to date. Finally, the fourth one is anchoring and adjustment which refers to the tendency for managers to over-value a failing business because they hark back to what it was once claimed to be worth or compare it with a similar business. This final bias deters business chiefs from selling the project off, which is exactly what they should be doing.

So, what can be done? The article points to two effective tools. First, you can make a new manager personally accountable for the assessment of the project’s future. A fresh perspective is brought to the process and the accountability ensures he cares very much about getting it right. The other tool is called a contingent road map, which provides markers for managers to refer to at key points of the assessment process. It will tell them when they should be considering hard decisions.

Source: Learning to let go: making better exit decisions
John T. Horn, Dan P. Lovallo, and S. Patrick Viguerie
The McKinseyQuarterly, 2006 Number 2

Review by Morice Mendoza

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