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Determining best time to pull the plug

When do you "pull the plug" on failed or unprofitable products or projects? Innovative companies face this kind of decision frequently, but other companies (and individuals) face fewer calls on whether to continue on the current path in hopes of future success or cut losses.

Ideally, these decisions would be made on a strict economic basis, balancing additional costs of continuing against potential future gains and factoring in the probability of success. Admittedly, this kind of economic exploration is easier said than done, but there are two other factors that often override objective analysis.

Ego and emotional attachment often play a role in these decisions. Committing to a product or project, especially one the decision-maker initiated, creates a sense of identification that is difficult to ignore. As a result, a failing project is often allowed to go on much longer than it should in strict economic terms. It is often half-jokingly said that products and ideas are like one's children and it's true. We take pride in our "children" and want them to succeed, no matter what.

Also complicating these decisions is "sunk cost," which refers to money already spent on a project. In nearly every case, sunk costs can't be recovered and cutting a product is an admission that you'll never get a return on that investment. Once again, emotion and ego tend to cloud judgment and encourage us to delay the painful admission that we have lost that investment decision. So we continue, but continuation is only delay; the decision remains in front of us: The product is unprofitable, so can more investment save the day?

Wikipedia defines the sunk cost dilemma as: "having to choose between continuing a project of uncertain prospects already involving considerable sunk costs, or discontinuing the project. Given this choice between the certain loss of the sunk costs when stopping the project versus possible — even if unlikely — long-term profitability when going on, policy makers tend to favor uncertain success over certain loss. As long as the project is neither completed nor stopped, the dilemma will keep presenting itself."

So, faced with the choice between "uncertain success and certain loss," most people opt for the former even though that decision is not really a decision, just a postponement.

Nevertheless, success seldom comes on the first try. History is filled with failure after failure after failure followed by stunning success. When asked about a series of failed experiments, Thomas Edison is said to have remarked, "I have gotten a lot of results! I know several thousand things that won't work." On the other hand, Einstein is credited with saying the definition of insanity is doing the same thing repeatedly and expecting different results.

Neither Edison nor Einstein would continue down a path shown to be a failure, but neither would abandon a project completely if there were another approach to try. They would extend the experiment but change a critical element while hoping for a better result ...; unless the idea was proven to be false or impractical.

But at what point do you know that for certain? And would you be willing to admit defeat and pull the plug?

Dave Turbide, CFPIM, CIRM, CSCP, CMfgE, is president of the Granite State chapter of APICS, the association for operations management. He is a Seacoast New Hampshire-based independent consultant and freelance writer. Reach him at dave@daveturbide.com.

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