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ULMS351

Dangers of Escalation of

Commitment

by

Ashley Bromilow

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Published on: Friday 8th November 2013

FAO: Senior Civil Servant regarding the HS2 Project

List of Contents

Executive Summary ______________________________________________ 3

Introduction ___________________________________________________ 5

Psychological forces of Escalation

_____________________________________ 5

Social Forces of Escalation

_________________________________________ 7

Economic forces of Escalation

_______________________________________ 8

Organisational forces of Escalation

___________________________________ 8

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Why HS2 is prone to Escalation

______________________________________ 9

Measures for Escalation reduction and Recommendations

___________________ 10

Conclusions _________________________________________________

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Terms of Reference

_____________________________________________ 13

Executive Summary

The writer of this report is Ashley Bromilow representative of the

University of Liverpool and my role is to warn the Civil Servant

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involved in the decision making processes of the high profile,

controversial High Speed Rail Project known as HS2 .

The main issue considered in this report are the dangers of

Escalation which are relevant to HS2 as it is a high risk,

vulnerable project due to its long haul and high costing nature.

It reflects the dangers of Escalation and the Psychological,

Social, Economical and Organisational forces which drives decision

makers to persist in making bad decisions. The forces will reflect

why some decision makers may have distorted judgement when making

important decisions regarding the future of HS2.

This report has an aim to suggest measures and recommendations for

reducing Escalation and why decision makers such as Civil Servants

and Politicians should take extra precaution before making further

decisions.

It is critical that the measures and recommendations are

considered from this report as HS2 runs the risk of wasting more

resources and potentially incurring more sunk costs. This report

stresses the importance of why you should consider termination or

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freezing the the project in the event of marginal costs exceeding

marginal benefits.

The explanations and precautions I have suggested have an aim to

reflect insight to why reducing the effects of escalation will be

more beneficial to HS2 in the long run and have been backed up by

academic sources.

Damages by ignoring these precautions and persisting beyond an

economically defensible point will incorporate greater problems in

the future for all involved including the economy as a whole if

further resources and public spending are pursued on a black hole

project.

The main findings of the report are that decisions can be

distorted by a range of factors which make increase the pressures

to persist, however the correct solution is to take a change of

direction before it risks becoming a run away project such as the

Edinburgh Tramline Project.

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The main conclusions of this report is to implement a course of

action to reduce the effects of Escalation and to only persist if

benefits outrun costs.

Introduction

High Speed Two Limited are the organisation responsible for

developing the HS2 project which is a major long haul high speed

rail development with an aim to deliver enhanced rail capacity and

rapid connectivity between Britains’ major conurbations. The

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estimated completion date is 2033 at an estimated cost of £33

billion. There is a lot of hype surrounding the project and is

considered controversial due to fear that marginal costs will

outweigh marginal benefits and is susceptible to becoming a run

away project. Civil servants are privately suggesting that

finalization of HS2 could exceed £70 billion. The Guardian (2013)

proposes that “critics fear that the benefits would be minimal

given the price tag.” The importance of this report is that it

will highlight the dangers of escalating commitment, suggesting

measures to avoid HS2 becoming a runaway project and spiraling

beyond a point of no return.

Escalation of Commitment is when decision makers of projects

persist beyond an economically defensive point, continuing to pump

resources into a bad projects despite negative feedback. Drummond

(2001:196) expresses it as “throwing good money after the bad.”

There are multiple pressures to why decision makers will continue

to persist in such projects although goals are not met. This

report will discuss four main forces which are: Psychological,

Social, Economical and Organisational and measures will be

suggested to prevent HS2 becoming a ‘black hole’ project.

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Psychological forces of Escalation

Psychological forces can result in organisations engaging in risk

seeking behaviour through taking shortcuts as a result of

uncertainty or overconfidence about the future of a project. These

foolhardy victims of psychological traps have potential to cause

spiraling Escalation to the level of no return. Unfortunately,

through the development of blind spots, they may only realise that

a project needs an urgent change of direction when they are faced

with the vivid shock of a crisis; this stage is usually too late.

In most Escalation situations Framing Effects take place. Framing

is derived from Prospect Theory were problems are framed as a

choice between losses, encouraging risk seeking behaviour. Basic

dilemmas are that risk seekers may favour risking a definite loss

and through persisting they may avoid future losses altogether. On

the other hand , this can backfire potentially worsening the

overall loss. Drummond (2012:136) emphasizes that “when problems

are expressed negatively, decision-makers tend to become risk

seeking.”

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Ego Defensiveness regards decision makers who may be too afraid of

failure or believe they cannot fail due to over competence.

According to Drummond (2012:131) “ego-defensiveness is one of the

most powerful drivers of escalation” This illusion, along with the

over confidence bias, results in decision makers losing sight of

probabilities against them, believing in succession although signs

of failure are evident.

Irresponsible, irrational decisions such as the reluctance of

letting go of sunk costs is a danger in Escalation situations.

Huge investment of resources have been poured into HS2 such as

money, time and emotions implementing pressures to escalate as

previous work may be viewed as wasted. Honoring sunk costs is

problematic as they should be ignored because they do shape the

future of the project or take into consideration the allocation of

new resources. Managers may base strategies on sunk costs and not

implement quitting points. Bazerman & Moore (2009:102) express

this is because they feel they have “invested too much to quit.”

Anchoring traps are a concerning bias and increases vulnerability

of projects like Hs2. Decision makers may apply past knowledge or

successes to make current decisions. Research from The Harvard

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Business Review suggests effective reduction in Anchoring.

Hammond, et al (2003:4) suggest “using alternative starting points

and approaches rather than sticking with the first line of thought

that occurs to you.”

Social forces of Escalation

A component of social forces which steer Escalation is External

Justification. Vacillating managers or politicians feel personally

responsible for committing to a course of action. As a result,

they may feel afraid to express weakness in front of others by

withdrawing from a cascade of bad previous decisions. They may

resort to denial and sticking to their guns to protect their self

image. Staw & Ross (1987:70) state that “like most of us who are

protective of our self- esteem, managers may hang on or even

invest further resources to "prove" the project a success.”

Research shows leaders such as David Cameron and George Osbourne

have intentions to continue to persist in HS2, despite its

exceeding budgets. Social pressures have geared a yield to win

against competitive rivalry and to protect their public

identities. The Guardian (2013) draws attention to that “they seem

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willing to put their own pride and vanity above best value for

money for the taxpayer.” Walking away from obvious failure is

hard and maximizes difficulty for leaders to withdraw from failing

projects due to the requirement of openly admitting failure. This

is damaging to reputation. Drummond (2012:137) illustrates that

“admitting failure privately is hard enough. Admitting it publicly

is likely to be harder” Additional pressures is that leaders may

also feel obliged to appear consistent. Staw (1981:580) explains

that “norms for consistency in action may be another source of

commitment”

Economic Forces of Escalation

Economic influences are critical because termination of a project

could incur higher closing costs than actually continuing with the

project. Additionally, the economic damage of pulling out of

projects introduces a negative effect on reputation.

Decision makers have legal obligations towards contractors in

projects like HS2. Termination would incur penalties resulting in

high redundancy payouts. Investors also run the risk of their

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investments becoming sunk costs, resulting in compensation owed to

preference dividend shareholders.

A danger is that there is no salvage value and benefits cannot be

derived until project completion. In relation to HS2, there will

be an additional cost of ripping out tram lines. Staw and Ross

(1987:) explain that “a project’s salvage value and closing costs

can also impede withdrawal.”

Organisational forces of Escalation

Internal politics is an organisational variable which influences

Escalation to persist. It is game between selves in an

organisation to keep a project going and results in ruining

internal processes, increasing churn and increasing useless

expenses. Personal egos in a decision results in keeping

information to oneself and hidden agendas. Withdrawal of a project

can also cause further trouble known as Administrative Inertia.

Block (1989:23) explains that “administrative inertia may make

project discontinuation difficult.”

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An additional factor is Vested Interests in a venture which

increases escalation and distorts rational decision making.

Drummond (2001:244) stresses that the “pressure of vested

interests results in an overly optimistic assessment of the

prospects.”

There are increased external organisational pressures were people

stand too much to gain from the completion of a project, in

relation of the HS2 project, this could be surveyors and train

companies. The high expenditure of high profile projects can cause

mounting political pressures and pulling out can cause disruption

and further trouble.

Why HS2 is prone to Escalation

Projects like Hs2 are extremely vulnerable to spiraling Escalation

as it is a long haul operation and there is no likely benefit to

be derived until project completion because a wealth of economic,

timely and emotional resources have already been invested.

Drummond (2012:131) reflects that “the pressures of persistence

are likely to be most intense where so - called “long haul”

projects are concerned.”

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The cost to benefit ratio may cease to stack up and the

reallocation of new budgets and more time is required for it to

continue. The passage of time can entrap organisations and allow

them to go way over budget. A similar controversial transport

project is the Edinburgh Tramline project. Research from the BBC

[Online] (2013) exposes that “the tram project has cost £776m -

millions over the original budget - and is years behind schedule.”

In the beginning all projects like HS2 have a bright future but as

time goes on further implications are apparent as the operation

increases in complexity, conflicting with any early decisions

which had once made sense. I warn that once so far in the HS2

Project, progress is harder to stop due to huge investments and

infrastructure. In regards to a similar run away transport project

which reflects this statement, Drummond (2001:102) confirms that

“once construction started... delays and huge cost overruns

destroyed the optimistic projections.”

Now that the risks of Escalation have been addressed and it is

foreseeable that HS2 is vulnerable it is critical that the

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following measures are considered to avoid risks of becoming a run

away operation.

Measures for Escalation Reduction and Recommendations

Identifying quitting points and introducing risk assessment models

can reduce escalation. Firstly they need to identify problems,

implement rational solutions and evaluate the range of

alternatives before making a choice. In relation to risk

management, research from KPMG Internal Control Review (1999:15)

suggests that “devices used to manage risk include the transfer of

risk to third parties, sharing risks, contingency planning and the

withdrawal from unacceptably risky activities.”

It is also vital for managers to set limits of expenditure to

avoid the project going way over budget and the potential loss of

additional resources. Note that termination of HS2 may introduce a

danger of throwing away an economically viable decision, therefore

management of HS2 should weigh up the opportunity costs of

reaching quitting points before withdrawal, weighing up the values

of alternative investment opportunities.

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Not identifying quitting points is a major fall down in rail

operations. I would advise to set clear milestones as there are

not many indicators which show obvious failure. Bazerman and Moore

(2009:65) suggests “when facing a risky decision, you should

identify your reference point”

Framing options should be avoided in order to reduce Escalation.

To become more loss adverse, Kelly and Milkman (2011:6) explain as

a measure, organisations should “reframe losses as gains to

prevent risk-seeking behavior.”

Considering fixed term contracts could benefit managers because

the repudiation of permanent positions incur high penalties.

However, you should be weary that as the operation increases in

complexity, workers such as civil engineers may use this to their

advantage. They may bid low in the beginning but demand more as

the infrastructural project gets more intricate. Stopping and re-

contracting may be a more expensive option. Drummond (2012:127)

explains that “firms bidding for contracts may be tempted to

submit artificially low bids.”

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Managers with a high emotional attachment and over involvement are

harmful to HS2. Drummond (2012:147) illustrates that “dedicated

managers can invest too much of themselves in a project that their

judgment becomes clouded.” Recommendations for HS2 is to possibly

change for a third party project manager with less baggage who are

less susceptible to bias with no vested interests. Kiel and

Mahring (2010:18) suggest that “the potential for such bias

entering into the dashboard can be reduced if it is constructed or

verified by a third party without a vested interest in the

project.”

Beneficial characteristics of a project manager would keep the

opportunity costs and alternatives under review incase the project

needs a change of direction. They should consider redirecting

resources onto other projects if the marginal costs exceed

marginal benefits and not be afraid to abandon previous successes.

As mentioned earlier, sunk costs are irrelevant to the future of

Hs2 and should be bypassed as they do not account for the

reallocation of the new resources needed. Sleesman, et al

(2012:546) stresses that “sunk costs simply should not be a

consideration.”

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Conclusion

To conclude, my overall advice would be that if the HS2 fails to

turn out as expected, they should strictly only persist if

marginal benefits exceed marginal costs. If quitting points have

been reached and opportunity cost is more valuable than withdrawal

costs then it is strongly advised to halt the HS2 operation. If

this advice is not considered, the decision runs risk of becoming

a run away operation with catastrophic impacts for all involved,

backlashing on the economy as a whole.

Terms of Reference

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Bazerman, M. & Moore, D. (2009). Judgement in Managerial Decision

Making. 7th ed. United States: John Wiley & Sons, Inc

BBC. (2013). ‘HS2 rail project costs out of control, says Labour.’

[Online]

Available: http://www.bbc.co.uk/news/uk-scotland-edinburgh-east-

fife-24124047. Last accessed 1st November 2013.

Block, Z. (1989). Damage Control for New Corporate Ventures. The

Journal of Business Strategy. 10 (2), p22-28.

Drummond, H. (2012). Guide to Decision Making. London: Profile

Books, Ltd.

Drummond, H. (2001). The Art of Decision Making. London: John

Wiley & Sons, Ltd.

Kelly, T.F., K.L. Milkman (2013). ‘Escalation of commitment.’

[Online]

Available:http://opim.wharton.upenn.edu/~kmilkman/

2011_10_23_escalation_FINAL.pdf. Last accessed 3rd November 2013.

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Kiel, M. & Mahring, M. (2010). Is Your Project Turning into a

Black Hole? California Management Review. 53 (1), p6-31.

KPMG. (1999). ‘The KPMG Review: Internal Control.’ [Online]

Available:

http://www.ecgi.org/codes/documents/kpmg_internal_control_practica

l_guide.pdf. Last accessed 19th October 2013.

Staw, B.M. & Ross,J. (1987). Knowing when to pull the plug.

Harvard Business Review. 65 (2) p68-74.

Staw, B.M. (1981). The Escalation of Commitment to a Course of

Action. Academy of Management Review. 6 (4), p577-587.

Sleesman, D.J., Conlon, D.E., McNamara, G., & Miles, J.E. (2012).

Cleaning up the big muddy: A Meta-Analytic review of the

determinants of Escalation of Commitment. Academy of Management

Journal. 55 (3) p541-562

The Guardian (2013). ‘How HS2 compares with other runaway rail

controversies.’

[Online] Available:

http://www.theguardian.com/uk-news/shortcuts/2013/oct/29/britain-

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hs2-worlds-controversial-rail-project-high-speed.. Last accessed

20th October 2013

The Guardian. (2013). ‘HS2 rail project costs out of control, says

Labour’ [Online]

Available: http://www.theguardian.com/uk-news/2013/sep/23/labour-

hs2-mismanaged-rail-project. Last accessed 28th October 2013.

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