MGMT 8009M Week 7 Escalation Case Example

Funded After the Sponsor Left: An Escalation Case Following a Distributor's Four-Year System Replacement as Commitment Moved From One Executive's Judgment Into Departments, Contracts and a Review Template

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Walden University

MGMT 8009M: Organizational Decision Making and Judgment

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Month Day, Year

Funded After the Sponsor Left: An Escalation Case Following a Distributor's Four-Year System Replacement as Commitment Moved From One Executive's Judgment Into Departments, Contracts and a Review Template

Four Budgets in a Row

Wexley Supply, a composite wholesale distributor of electrical and plumbing products with 22 branches, approved the replacement of its order management and warehouse systems in early 2021. The project was scheduled for 18 months and budgeted at $6.2 million. Four years later it was still running.

[after]

The wording of the review question is taken from the agenda of each finance committee meeting. It changed once, between years 1 and 2, and then did not change again.

Table 1

Annual Funding Reviews of the System Replacement Project

The Model Used to Read the Pattern

Staw and Ross (1989) organized the causes of escalation into four groups: project determinants, such as the expected payoff and the size of the remaining cost; psychological determinants, such as self-justification and the reluctance to admit a loss; social determinants, such as the need to appear consistent before others; and structural determinants, such as the political support and institutional arrangements that grow around a project. They argued that these determinants operate at different times, with project and psychological factors often dominant early and structural ones later. The case uses that model year by year rather than assigning one cause to the whole period.

Year One Belongs to the Sponsor

The project's sponsor was the chief operating officer, who had presented it to the board in 2021 as the centerpiece of a modernization plan. At the first review, the project was already $1.9 million over its original budget. The sponsor argued for continuing, citing the vendor's progress and the cost of reverting to the old system. In the experiment reported by Staw (1976), participants who had themselves chosen an investment that then performed poorly put more new money into it than participants who inherited the same choice from someone else. The first continuation fits that finding well: the sponsor was publicly tied to the project, the overrun was modest, and admitting failure after one year would have been costly to her standing. Social determinants also appear. The board minutes record the sponsor describing the project as "the decision we made together," which tied the board's own consistency to the choice.

The Second Year: Mixed Determinants

By the second review the overrun had grown and the question had shifted from whether the project was on track to what was required to finish. Project determinants still mattered. The vendor reported that about 70 percent of configuration was complete, and the remaining cost looked smaller than the cost already spent. But the change in the review question is the first structural sign. A question about requirements to complete assumes completion.

The Department That Needed the Project

In mid-2023 Wexley created a business systems department of twenty staff to run the implementation, train branches and maintain interfaces. The department's charter stated its purpose as delivering the new platform. From that point, a decision to stop the project would also have been a decision to dissolve a department, reassign its staff and write off its training investment. Ross and Staw (1993), in their study of the Shoreham nuclear power plant, described how the arrangements built around a long project came to support its continuation independently of any individual's judgment. The org chart shows the same development at Wexley. Structural determinants are visible in documents, not inferred.

The vendor contract was also amended in 2023. The amendment extended the schedule and added exit fees that rose with each phase completed, so stopping in 2024 would have cost about $1.1 million in fees alone.

Funding Without the Sponsor

In January 2024 the sponsor moved to lead a newly acquired division. Her successor had no part in the original decision. If escalation at Wexley had been driven by the sponsor's need to justify her choice, her departure should have opened the way to a fresh look. It did not. The March 2024 review approved another $2.6 million on the same question, cost to complete, and the March 2025 review did the same. The successor's memo to the finance committee in 2024 discussed only how to finish faster.

The Question the Review Asked

The case argues that the review question itself made continuation the default answer. A committee asked what it will cost to finish compares remaining cost with remaining benefit and will often find finishing worthwhile, however much has been spent, because the spent amount is sunk. That comparison is sound on its own terms, yet it never asks whether the project, knowing what is now known, should be started today, and it never compares the project with alternatives such as a phased replacement or a different vendor. The template excluded the question that would have exposed the escalation.

Recommendations

Three changes address the structural determinants the case found. Each annual review should ask whether the organization would approve the project today, at the remaining cost, against named alternatives. A reviewer with no role in the project, such as the internal audit director, should prepare the alternatives. And project departments should be chartered for a fixed term with a stated review, so that their continuation is a separate decision. Advising leaders to admit mistakes would address only the first year.

Limits

Wexley is a composite case. Its record is constructed to show a pattern common in system replacements, and a real record would likely contain more ambiguity about when the determinants shifted.

References

Ross, J., & Staw, B. M. (1993). Organizational escalation and exit: Lessons from the Shoreham nuclear power plant. Academy of Management Journal, 36(4), 701-732. https://doi.org/10.2307/256756

Staw, B. M. (1976). Knee-deep in the big muddy: A study of escalating commitment to a chosen course of action. Organizational Behavior and Human Performance, 16(1), 27-44. https://doi.org/10.1016/0030-5073(76)90005-2

Staw, B. M., & Ross, J. (1989). Understanding behavior in escalation situations. Science, 246(4927), 216-220. https://doi.org/10.1126/science.246.4927.216