Returning to the office for many is based on a sunk cost fallacy. For those of you that haven’t been acquainted with the term, a sunk cost fallacy is usually referring to decisions made based on investments that were previously made. So in this case, the argument for many leaders is we spent all this money to have an office, therefore, you should return to the office. And that’s where the fallacy comes in. These prior investments end up being the basis for justifying a return to the office.
In leadership, sometimes it’s hard to know when you should keep going and when you should throw in the towel. This can be especially true if you’ve significantly invested time/money in something very visible. But as leaders, it’s important to remember that if we make decisions based on sunk costs, we are not being objective. And if we are being objective, we shouldn’t be making decisions based on sunk costs at all!
The difference between fixed costs and sunk costs
Fixed costs are things like payroll and expenses that have ongoing costs. The return to the office argument is usually based on the amount of money spent on the office. “We have an office so we should use the office”. Or more strongly, “We have X invested in our office so we need to make the best use of it”. This is often unspoken, but it’s usually the logic behind the decision. Unfortunately, office costs are generally sunk costs rather than fixed costs.
Sunk costs are any money that you have already spent. It doesn’t matter how much has been spent; once it’s gone, it’s gone. A sunk cost fallacy is when you justify future purchases or investments by looking at past purchases instead of focusing on the future needs of your business or team. Just because you may have invested 10M dollars in an office, doesn’t mean you have to keep using that office to further benefit from that investment. Maybe it’s time to sell or lease all or part of the building. Forget about the decisions made before. Focus on the actual business need.
The Sunk Cost Trap
Throughout history, some very smart people have fallen into this trap. One of the most visible was the Concorde, the supersonic aircraft that flew from Europe to the United States. It was an impressive joint venture by France and England that flew for over 25 years. Despite how much they were losing, both governments continued to produce and fly the Concorde. Lots of people knew it would never be profitable, but they had invested so much in the project that they just kept investing more. Eventually, it was shut down in 2003.
Kodak is another common brand that suffered from the sunk cost fallacy. In the 1970s. Kodak developed the digital camera, but they were so invested in their paper and chemical businesses that they told the developer not to tell anyone about it. As digital cameras from everyone except Kodak took over the world, Kodak eventually filed for bankruptcy. Many leaders don’t realize the difference between sunk costs and business expenses and that’s where the problem occurs.
What is returning to the office costing you?
Returning to the office is presenting challenges for many companies. Before trying to get your staff back to the office they don’t want to come back to, try to step back from any previous investments in your infrastructure. Most have probably already been expensed or depreciated. And if they are tangible assets, they can probably be sold or leased. If you have leased space, when can you get out of it?
Here are two representative formulas that can help you make a more informed decision.
- physical office costs X ( days remote / days worked ) X .80 = potential cost savings by reducing office space
- existing space X ( days office / days worked ) X 1.25 = estimated new space need
The reason for the multipliers in each equation is that space needs are not linear. Just because you cut your staff space need in half, doesn’t mean your actual need will be the same. Your exact numbers will vary based on your existing office setup. Feel free to adjust the formulas to fit your situation to see if returning to the office makes sense.
At the end of the day, you may still need an office. It may not be the office you have, so don’t take that off the table. Let the decision be based on a business need and not past investments that you are trying to get people to use.
