IT Modernization is the process of replacing legacy systems of old hardware and software with the latest technology to improve performance. Legacy systems can be considered sunk costs, costs that are unrecoverable. For example, let’s say that your company makes an investment by purchasing a physical disk of software that increases productivity. The software is refundable for a month, but a whole year passes, so your company can no longer get a refund. Additionally, the license accompanying the software prevents your company from reselling it. Thus, the software purchase would be a sunk cost. If your company bought something like furniture instead, they may be able to recover the costs if they could successfully resell it. This purchase wouldn’t be a sunk cost.
The sunk cost fallacy is the justification of using an unnecessary resource because of a prior investment. For example, if there is a superior alternative to the software your company purchased, your company would commit this fallacy if they decided to keep using the old software just because it cannot be refunded. This fallacy can explain why new investments eventually become legacy systems that need to be replaced. Fortunately, new technology can change how we invest in software and infrastructure.
Investments don’t have to be sunk costs. In 2018, Jake Burns explained the difference between the fixed-cost and consumption-based models: “In the fixed-cost model investments in performance are a sunk cost, but in the consumption-based model the costs are recoverable.” Burns was promoting Amazon Web Services, an example of a cloud computing platform. “Clouds” are remote networks of servers that offer specialized services, including these three main categories: Software-as-a-Service (SaaS), Infrastructure-as-a-Service (IaaS), and Platform-as-a-Service (PaaS). The general idea is that instead of storing hardware and software on-site, thus paying for upkeep and sunk costs, you can subscribe to remote services and only pay for what you currently need.
IT Modernization can be challenging for some companies. Earlier this month, Peter Karlson of Forbes noted that when it comes to replacing legacy systems with SaaS and IaaS, “[m]any organizations have sunk costs … that have been amortized over a number of years. They have a difficult time justifying replacing something that still works despite the potential forward-looking business value.” Thus, many organizations may be held back by the sunk cost fallacy. Here at SD Solutions, LLC, we embrace the use of SaaS to achieve our goals. We encourage businesses to push past sunk costs, replace legacy systems, and do what’s necessary to achieve maximum productivity for the present and the future. Cloud services help businesses, big or small, use the best information technology without creating future outdated legacy systems.