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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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