Do not let a “sunk” cost sink your organization

Large up-front license fees for software are a serious issue, and one we need to eradicate. However, one of the biggest things holding organizations back today is not the issue of paying those fees again now or in the future, but the issue of not letting go of the fees they paid in the past…even if it is the recent past.

I have often heard the comment, “Well, we spent a lot of money on that system and, even though it is not meeting our needs and holding us back, we need to wait until we have gotten our money’s worth to make a change.” While the “get your money’s worth” mindset seems to make sense, it is actually a logical and economic fallacy. “Sunk Cost” is one of the most important, but most overlooked, financial principals for nonprofits. It is important for organizations to take a holistic view around all decisions that takes into account all costs and potential revenue, so that they are focusing on total net revenue to achieve their mission. Let me elucidate with a simple example.

Say X organization has invested $50,000 dollars in a piece of proprietary software. That $50,000 includes license fees, deployment costs, staff training and time, etc. However, Soon after launch they discover the software is not meeting their needs. Staff time is twice what was expected and, as a result, their fundraising staff are only able to execute half as many campaigns as expected. In addition, restrictions in the data collection, tracking and segmentation means that certain targeted appeal strategies cannot be executed. But the organization feels like they invested so much in the software, they just have to “live with it” for a while and “make do”.

This sense of being held hostage is not only debilitating, it is a false sense of imprisonment. There are plenty of options for the organization. For example, the organization finds a piece of open source software they test out (for free) and find could solve th majority of their problems. 12 months after buying the current software, they invest $10,000 in data migration, implementation, some customization and staff training and time. Since the software is open source, they were able to tailor an number of modules to their specific business processes and adapt a community built adresss verification integration that significantly reduces duplicates and bad addresses in the system.

Once this new software is live, they find that they have cut staff time in half around standard operations with the software. Let’s say those two staff are paid $40,000 per year each and were each spending 25% of their time with the previous software. That is a staff cost savings of $20,000, netting $10,000 in efficiencies right there.

In addition, the new software capabilities around fundraising and the efficiencies gained have granted the staff time and ability to execute their more sophisticated fundraising strategies, which have yielded an additional $50,000 in the first 6 months!

Therefore, the move away from the previous system, even though it had only recently been acquired, yields an additional $40,000 in total net income to further the organization’s mission. This is why being anchored to a system that is not working, in the false belief that you have to get value out of a sunk cost, only serves to drag down your ability to help those you serve. And, in uncertain economic times, the ability to reduce costs while generating more dollars is needed now more than ever.

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Explore posts in the same categories: Fundraising and Donor Relationship Management, Musings on Software and Life

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