I spoke yesterday about why I believed Google made the smart choice in investing in Google Wave.  In that post I looked at the reasons why Wave’s loss wasn’t that tragic (thanks to intellectual capital generated during its construction).  I also explained why the potential gain Google could have had if Wave had taken off (near universal adoption on their mail/message platform) were well worth the risk.  Today, I look at another lesson from watching Google deal with Wave, using opportunity cost to know when to shut a project down.

There are way too many managers and executives who would look at shutting down Wave and say, “If we shut down Google Wave, it will mean that we have wasted ~$20M (that’s totally just a guess) on a development effort that failed, we should keep it running and see if it gains traction.”  The argument sounds completely logical, but it fails to consider two business concepts, opportunity cost and sunk costs.

The concept of sunk costs means that the money spent is gone, it shouldn’t be part of your decision.  Google, accurately, doesn’t view that ~$20M as money wasted or money poorly spent when making this decision.  In fact, it doesn’t view that money at all.  The question is one of opportunity, not of history.

That’s where opportunity cost comes in.  Google did have an opportunity to keep promoting and developing Wave in hopes that it would turn the corner.  It’s something they’ve been doing for the last 6 months, in spite of bad returns on Wave.  Why change course now?  Because the opportunity costs have changed.  Google now has a new, social project and leaving the code and developers from the Wave effort out of that new project could keep the company from being able to compete successfully with Facebook.  Such an important project means that the opportunity cost of continuing Wave jump and apparently they jump higher then Google found acceptable.

The lesson we can learn from Google is about how to think about shutting projects down.  Instead of saying, “If we shut down Google Wave, it will mean that we have wasted ~$20M on a development effort that failed, we should keep it running and see if it gains traction.”  We can think of sunk and opportunity costs and say, “Should we keep a talented group of developers and marketers working on Google Wave or should we devote them to our new social media efforts?”  We need to learn to think of things in the latter fashion.