Productonomics is my own little invention that applies an “economic way of thinking” to technology product development, and the Fallacy of Sunk Cost is, IMO, a highly applicable economic principle. Proper understanding and application not only benefits the products we make, but it benefits morale and company culture.  To give credit where credit is due, Steve Bronstein, a former colleague and a current friend, is really the one who stuck this phrase into my head and made me see the light (he very effectively argued against a position I held by dropping this science on me).  I realized at that point how crucial the concept is in decision-making and strategic thinking, but I also realized how counter intuitive it is.

What is it?

The principle is easy enough to understand, and it can probably be summed up most succinctly by the “dont throw good money at bad” idom, although that’s not all there is to it.  A short definition that I like is “Once the money (or time or effort) is gone, then it’s gone. There’s no point in worrying about this” (from Plonkey Money). This may be oversimplifying it a bit, but there is a ton of stuff out there on the web that can explain it better than I can (links below), and I want to focus specifically on how it can help product development. Most of what you find out there is associated with money management/investing, but the principle holds for any decision-making situation where spent resources come into play.

How is it useful in Product?

Our decisions now only affect the future and have no relationship to the past – -  that’s the jist, and logically, it is not hard to understand this. If I buy a ticket to a bad movie and I can’t get a refund, sitting through the movie doesn’t re-acquire any of the value I have lost – I’m better off walking out and doing something that gives me more utility/return – that’ s the rational thing to do anyway. But now let’s consider a situation that many of us have been in – the team has been working on a roadmap feature-set for months… discovery, design, prototyping – you name it. Its been all consuming and buckets of sweat and tears have gone into it. When the assumptions were made and the numbers were run months ago, it seemed like a home run, but just recently – we either realized we were wrong and nobody wants this thing, or a bunch of external factors changed (and when doesn’t this happen?) or both. What changed isn’t important – - competitive environment, economic environment, regulatory environment, technology stack, legal framework, etc., etc., etc. – - the point is that what to do NOW is what’s important, and what was decided 6 Months ago, while perhaps relevant for knowledge, is not relevant in the decision calculus going forward.

It comes down to two positions:

• We should just kill the entire project and do something else.
• We have put too much work into this and gone too far to quit now – we will have lost all of that work.

Well, assuming that the core assumptions are accepted to be true – (that we were wrong or the landscape is no longer receptive)  - choice number 1 is the correct choice.  Now, its important to make the distinction between the “we were wrong” vs. “things outside our control changed”, because each situation presents its own challenges to the people on the team, but let’s be clear that in either case –  bullet #1 is the way to go.  All that hard work is in the past, and without a time machine, we can’t retrieve the resources. All we can do now is make the best decision possible that defines our path from today onward, so continuing to throw resources at something we all feel is doomed is a fools errand.

What about the “Zen” Part?

Well, that all sounds fine and dandy and rational and what-not, but here’s the rub… the rational decision is likely to be unpopular, and if the culture of the company doesn’t allow for failure to be acceptable, there is going to be political face-saving shenanigans, finger pointing, and dogmatic group-think takeover. This quip from the Skepdic Dictionary says it all:

To continue to invest in a hopeless project is irrational. Such behavior may be a pathetic attempt to delay having to face the consequences of one’s poor judgment. The irrationality is a way to save face, to appear to be knowledgeable, when in fact one is acting like an idiot.

Ouch, but true… and I’ve been there… oh, have I been there. What’s the answer?  Well, that’s where the “Zen” part comes in – its really about the company culture from the top down. We can’t be afraid of failure or creative destruction (we’ll be talking a lot about ‘cd’ and Schumpeter in the future), and this is the essence of the tech start-up, is it not? One of my favorite business books, Getting to Plan B, is devoted entirely to this concept: adapt and overcome.  Well, you can’t adapt if you don’t make mistakes and then recover from them quickly, so understanding this fallacy and injecting that understanding into the culture of the team is important.  The “Zen” part is being able to be in the moment, acknowledge that a change in direction is the best course, and let go of the past – “bend like a reed in the wind” (yes, that is a Dune quote). To sum this one up in manner in which most people can relate, how about this quote (relayed by my friend and former colleague, Mike Tatum from Whiskey Media):

Would you rather be rich or right? – a very wise (and probably rich) man

Don’t Take it Too Far

Just like any knowledge, this can be misinterpreted or taken too far, so to be clear, this principal does NOT propose that we do not or should not learn from the past. Knowledge and experience, of course, should shape our decision making. Also, if I am to be fair, the product scenario that I described above is really referencing a “Sunk Cost Dilemma“, and there is a significant distinction. The “sunk cost dilemma” adds a more realistic framework for real-life — specifically introducing uncertainty and multiple events. In my example above, I said “assuming that the core assumptions are accepted to be true – (that we were wrong or the landscape is no longer receptive)“. Well, the reality is that we probably aren’t often that certain that the “we were wrong” assumption is true, and so we are only making the best decision we can with the information we have – thus, uncertainty. In a Game Theory context, these decisions are made multiple times, and if you make the decisions based strictly on a calculus of ONLY looking at open costs (not sunk costs), you actually get into a situation where the aggregate of the each “correct” decision creates a negative result over time.

As decisions are only made considering open costs but not sunk costs, each single decision is computed to be beneficial. But in the end, the overall payoff of the project is negative. While the project progresses towards disaster, the decision not to go on with the project gets more and more unlikely. The project is like a train: once it has been put on a track, it is very difficult to change its direction.

I’m gonna go out on a limb here and say that I think a fundamental understanding of the sunk cost fallacy is still incredibly beneficial, and this scenario, in a way, argues the same broad point that I am making – - momentum for momentum’s sake is not productive, and realistic, honest decision-making is good.  Essentially, this dilemma is created by “too much of a good thing”, and understanding the fallacy is just another tool in the box… its not dogma. Oliver Lehmann’s “Visionary Tools” offer some insight into how to avoid this dilemma, and I find them to be good common sense tactics – nothing we wouldn’t already be trying to do anyway (short reporting cycles, defined roles, proper interpretation of data… common sense, in short).

Say It Loud, Say It Proud

The best place to start changing culture is with yourself, and this is a process.  Just working in a ”but… i could be wrong” now and then is a good start.  Saying “I WAS wrong, and here’s what I propose we do about it” in front of a room full of people is perhaps the ultimate test. Ultimately, if the nature of the relationships with your clients, customers, co-workers, and investors is honest, humble, and thoughtful, then saying “I’m wrong” means that you don’t really have to say “I’m sorry”.

Resources:

http://sunk-cost.behaviouralfinance.net/

http://www.visionarytools.com/decision-making/sunk-cost-dilemma.htm

Readwriteweb‘s recent  addition of the “Readwrite Cloud” blog has been a real godsend for me and probably others who are faced with the task of creating products with “the cloud” in mind.  It seems like every product discussion I have, overhear, or read about these days involves a cloud component.  How can we “use the cloud” or how can we “cloud-enable” a product isn’t really how that discussion starts, though, and I think that it’s worth getting past some of the technical considerations and discuss what the cloud means really means for users and those of us who seek to please them.

Much like the now unfashionable and perhaps defunct “web 2.0″ label, “cloud computing” can mean lots of different things, but I think it is fairly simple if you look at it from the perspective of the end-user (as us Product people should always try to do). For me — in a nutshell – it boils down to a “where/how/when” question of access to data, content, or applications. Take this interesting company, for example:  http://www.zumodrive.com/.  As far as a “cloud” play for media, it can’t get any simpler, and there are lots of options for users for this kind of service. So how do they differentiate their product?  Well, its a subtle but interesting twist, pointed out here in this article on TechCrunch:

… the service includes a slightly different twist-ZumoDrive tricks the file system into thinking those cloud-stored files are local, and streams them from the cloud when you open or access them.

That might seem like a strange feature, but if you think about it, its terribly clever — users, even savvy users, aren’t yet completely used to/ and/or comfortable with the “cloud” concept, and by mimicking a boring old file-system, they bridge the gap between the users expectation and the real value of the service.  So, this got me to thinking… what’s a good short list to think about when you are developing products for the cloud?  Well, here is a short list…  I’m sure I’ll change my mind about what should be here as things progress, but this seems to me to be a good starting point.

1. Access – This is an obvious one, but it can’t be understated.  Users will use the cloud because it gives them access across time and space (whatever device, whenever they want)
2. Synchronization – While this is related to “Access”, there is a subtle difference.  Synchronization means that if I DO something or change any data via any interface or device, that change MUST exist across all devices and interfaces as soon as possible.
3. Trust – This is a big one, and recently, a lot of the bad publicity Facebook has been facing is driven by this issue. Users have to trust that their data is safe and private, end of story.  Something to consider here from a product standpoint, is allowing users to back-up their data. Also, companies should make it their policy in their EULA that if they go out of business, each user will receive a back-up before the doors shutter… that would be a big one for me if I was going to do anything really important in the cloud.
   
4. Openness – This is related to the Trust issue, but its slightly different in that what I rally mean is creating products that can share data with other applications and services, but also to keep the barriers to moving data entirely to another service simple and easy. Just like customer service 101 says that you are never nicer to a customer when they are leaving, the same should hold true for cloud-based services.

I recently read this quote somewhere, and unfortunately, I didn’t Evernote it (no attribution… so sorry!), but I did remember it.  I think its a good one…

Cloud Computing is not about Amazon, Its about how you reach your customers.

On the heels of introducing “Productonomics“, I figured I should go ahead and post something relevant, and this article caught my eye a few weeks ago from Silicon Alley Insider: Facebook Has Zynga By The Short Hairs — But It Needs To Be Careful. Yes, of course I appreciate any business article that can refer to pubic hair, but it speaks directly to the kinds of “broad spectrum” econ-based concepts that we all need to be thinking about as we build products.  I have always felt that when developing products, you aren’t JUST dealing with the current marketplace and what you think users want… you are mightily constrained by “what you have to work with”, and many times those constraints matter more than we think.

Its easy to examine at our “product arsenal” and determine the following:  “I have X many designers, developers, and project managers, and I have these tools and technology providers – ok, go”. The problem with that line of thinking is that, in a sense, we are creating an experimental environment that is doomed to provide a false reading of our reality… a  reality that is a complex system with lots of moving parts. We really need to think about the business and competitive environment that our company exists  in, and in many sectors, the business development and legal efforts may have more impact on your decision-making than anything else (just ask anyone building digital media products).

The article discusses the buyer-supplier hold up problem, and in my mind, its an insightful view into the relationship of Zynga and Facebook – - or any app developer to platform provider relationship (iPhone and Android App developers, take note – - – same situation).  A Product Manager, looking at their options from a pure “user advocate” position, might opt to say “well, our users love our game on Facebook, and it works well on Facebook, and we can develop many more features if we stick to one platform, and overall, the product will be better”.  That actually might be a true statement, but past the short-run, if the the party that provides the platform has too much leverage, the product can suffer severely from restrictions that you didn’t bargain for – - or more likely, the profits of your company suffer severely from leverage that you gave up (and then the product suffers from lack of resources).

So what conclusions can a Product Manager draw from this lesson? Perhaps another micro-economic principal is helpful to throw in to understand their situation: Interdependence.  A popular buzz-word thrown around these days to describe the positive side of interdependence is “ecosystem”, but its the same idea. We don’t live in a vacuum with our users, and our companies don’t operate in a static world.  We need to think ahead, and plan for “scale” and all that — but relying on your intuition to make the right guess is pretty damned risky – - I think the lesson learned is for us product people is that we are advocates of users, yes, but also advocates of flexibility.  The real value of Farmville is the game itself, and Zynga might lose some short-term market-share by building in some “flexibility”, but in the mid to long-run, they will be better off with a healthy if not slightly competitive relationship with Facebook and a product that can evolve regardless of the platform or distribution environment.  That discussion will will probably manifest itself in a “we need to give up short-term feature-improvements for longer term flexibility” discussion… not the easiest one to have. Clearly, though, its the conclusion that Zynga drew: http://www.technewsworld.com/story/70086.html.

When it comes to my blog and thinking and writing about things of interest to me (and hopefully others), I obscenely violate of the best practices that I enthusiastically promote to all those I work with – “generate ideas, quickly share them, iterate, optimize, repeat”.  Well, I’ve decided to stop violating this practice and share an idea that I’ve had rattling around in my head for quite a while: Productonomics. The idea is not especially revolutionary or even very original (the title may make some of you cringe – it even does me sometimes, but hey – it’s catchy). It may be that I am just collecting a sub-set of ideas or putting a slant on concepts that have permeated my industry for a long time, but I think that my approach narrow and unique enough to add some insight and value.  Most importantly, I have found this way of thinking to be very useful and productive in a very practical day to day kind of way. I strongly believe that that all companies and “product people” can benefit from taking a step back and looking at problems through different lenses, and the lense that micro-economics provides is very powerful and insightful for those of us who need to make decisions on a daily basis about “what people want and how we build it”.

I got so excited when I started to pull together these ideas that I went out and registered the domain and had all these delusions of grandeur of having the “Productonomics” blog taking off and getting me a book deal or something… well – for now, I still own the domain, but I’ll just post here on quiet little timjmitchell.com and set the categories of those posts to “Productonomics”.

Recently, I started consulting on a regular basis, and I am now feeling all of my time management skills put to the test.  I have always prided myself on good time management and good organizational skills, and I’m constantly tweaking my tools and process to optimize efficiency (yes, I am a self-repairing robot).  I am, in fact, an unapologetic “devotee” of David Allen and the “Getting Things Done” way of organizing and working. (Yes – it does look like a self help book, and yes, he does talk about reducing stress in your life, but it is extremely practical… I digress).  While working through a whole new set of processes for my consulting business, I ran across an old Powerpoint Deck that I put together a couple years ago for some time management training for my team.  Some of it is “loosely” based on GTD, and in order to get a glimpse of the “GTD way” you can take a look at the GTD Workflow Chart to understand a bit.I was managing a medium sized team, and it was a mix of a lot of different backgrounds — some music industry, some technology, some a little of both, some with a lot of experience, some not so much – you get the idea. The biggest productivity problems we had seemed, in many cases, to stem from some very core prioritization and work-flow issues.

Experience had taught me that as management, you simply can’t force people into “your way” of organization — especially in a rapid moving tech start-up environment.  People have to adapt to their own style and their own natural rhythm.  So, what I tried to do was formulate some really simple, non-preachy,  ideas around every day decisions that, in aggregate, eventually add up to all of the work we do.   There is definitely a good amount of “GTD” influence in here, but I tried to keep it light, simple, and more of a “guiding principle” kind of methodology instead of a “system”. You’ll even notice a fair amount of tongue in cheek in there — I was poking fun at myself for teaching “productivity”. Let me know what you think!  I’ll be posting some other interesting stuff about my experience with GTD soon.