‘You’ve bought it now. The money’s gone.’ That snarky comment made by thousands of parents (mine included) to their reckless child encapsulates the meaning of sunk cost. Once you met the cost, it’s gone: sunk. You’ve sunk it into the investment for good or for ill.
This, then, could be the shortest Big Ideas article yet. Sunk Cost is a familiar and easy concept.
In a world filled with temptations to take shortcuts, governance is our defence. It provides us with the direction and control that maintain the standards that serve the many against the carelessness or abuses of those with power.
It feels to this observer that never in my lifetime has the need for governance been as great as it is now.
Key Performance Indicators – or KPIs – stem from an insight that is most often attributed to Peter Drucker, in his 1954 book titled, ‘The Practice of Management’:
‘What gets measured gets managed’
That attribution may be contested, but the central assertion seems pretty sound. If your organisation measures performance against a specific metric, then its managers feel an incentive to manage their parts of the business, so that they perform well against that metric. KPIs are nothing more nor less than the key – or most valuable – metrics.
It turns out that you aren’t as rational as you may have thought. So, traditional economic theories that assume you are, are… well, flawed. We need an approach that accounts for self-interest and lazy mental short-cuts. Enter Behavioural Economics.
We’ve already told the foundation story of Behavioural Economics in our Management Thinkers series. There we looked at the two men who received Nobel Prizes in Economics for their work in the field:
Your brain is wired to think fast. So, to do this, it needs to take shortcuts, that psychologists call heuristics. But these shortcuts don’t always give the right answer. They give rise to cognitive bias.
Cognitive bias is the result of the shortcuts. If every car door you’ve ever encountered opens outwards, it’s a good bet that the next one you encounter will too. That’s a bias in your assumptions. Usually, it serves you well. One day, it may let you down.
But the cognitive biases that we need to worry about are those that are baked into our mental operating system. We make the mistakes without realising it. They lead to bad decisions – sometimes to catastrophe.
Systems thinking is a big idea that’s remarkably… simple.
It’s a simple idea about complex phenomena. And the principle virtue of systems thinking is that it reminds us that the real world is far from simple.
Indeed, when we try to apply simple solutions to complex problems, the solution tends to fail: often spectacularly. And it’s systems thinking that points us in the right direction. We need to think about the whole messy, complex, inter-connected system, if we are to have any chance of finding a solution that makes our problem better.
For hundreds of years, there has been little to challenge traditional hierarchies for their ability to organise at scale. Holacracy is doing just that.
It’s a form of Adhocracy, which we covered in an earlier article. But, whilst we are way past ‘peak adhocracy’, it seems that holacracy is is thriving.
Holacracy is a modern attempt to reform traditional hierarchies. It keeps the aspect of senior level overviews and subordinate focus. But it gives a far greater autonomy to individuals, and a more substantial decision authority to small teams at the focus of operations and change.
The Pareto Principle – also known as the ’80-20 Rule’ – is one of those ideas that crops up in many places. It is ubiquitous because it is an expression of a general principle of nature. It is an example of a power law. Extremely long rivers are rare. Small ones are very common. A small number of words appear frequently within a language, whilst there are very many words that we hardly use at all.
But what makes the Pareto Principle a valuable version of this phenomenon is that it is easy to articulate and understand. And it is therefore easy for managers to apply, to get better results. Consequently, since Joseph Juran rediscovered and named the idea in the 1930s, it has become an indispensable snippet of knowledge, for anyone in management.