We have spent months and significant capital developing a custom AI tool that is failing to deliver the efficiency we expected. How do we use strategic real options and the concept of flow costs to decide whether to kill the project or keep investing?

Question

Tyler Smith · Accepted Answer

When a custom software project fails to deliver the expected results, leadership teams often fall victim to the sunk cost fallacy. To make a rational, objective decision, you must use the concept of strategic real options and quantify the ongoing flow costs of waiting versus the cost of exiting the project.

Start by calculating your true flow cost. This includes the direct financial investment, the valuable executive team energy being consumed, and the opportunity cost of not pursuing other high-priority initiatives. If these ongoing costs outweigh the potential future value of the tool, you must have the courage to kill the project.

Bring the issue to your next weekly leadership team meeting and use the IDS process to evaluate your options. Ask your team if the project's underperformance is due to a solvable technical issue or a fundamental flaw in the original strategy. If the strategy is sound, look for ways to upgrade the quality of your execution. If not, make the hard decision to exit the project immediately. By managing your technology initiatives as strategic real options, you can protect your capital and focus on high-yield opportunities.