What it means
The phrase comes from an old tale about rulers giving rare white elephants as gifts. Because the animal was sacred, the receiver could not put it to work, yet it still had to be fed and housed.
The gift was an honour that quietly ruined its owner. In business the pattern is familiar.
A company buys a large factory, builds a flashy headquarters or invests in equipment that turns out to be much bigger than it needs. The asset sits there, generating costs for maintenance, insurance, utilities and staff, but little income.
The financial test is simple: compare the running cost with the value the asset produces. If the annual cost of keeping it is far higher than the income it earns, and there is no realistic plan to change that, it is a white elephant.
Finance teams should include maintenance, financing costs and the lost opportunity of tying up money in the asset. The accounting effect is that the asset may need to be written down.
If the carrying amount (the value recorded in the books) is higher than what the asset could earn or sell for, an impairment charge reduces profit. Facing the problem early usually costs less than carrying a growing loss for years.
Public projects also attract the label, for example stadiums or airports built for one big event and rarely used again. The same questions apply: who pays for the upkeep, and is there a plan for using the asset?
Good planning includes an exit option such as selling, leasing or converting the asset to a new purpose. Prevention starts at the approval stage.
A sound business case estimates the total cost of ownership over the asset's life, tests demand under cautious assumptions, and names the person accountable for results. Post-completion reviews then compare the outcome with the case, which discourages over-optimistic forecasts.
In practice
Real-world examples.
Example
A manufacturer builds a large warehouse for expected growth that never arrives. The building is two-thirds empty, but it still costs $450,000 a year to run, and the finance director proposes leasing out the unused space. Even a modest rent of $100,000 a year would reduce the annual loss by more than a fifth.
Example
A city builds a large stadium for a one-off event. After the event the venue hosts only a few matches a year, and the council continues to pay the upkeep from its budget.
Example
A software company buys a custom-built machine to automate a task, only to find that demand has shifted. The machine is used for 5% of its capacity while the company continues to pay for maintenance and licences.
Formula
Calculation
Net annual burden = annual running costs - annual income from the asset
Total burden over a period = net annual burden x number of years
Suppose a company owns a specialised building that costs $300,000 a year to maintain, insure and heat, and earns only $60,000 a year in rent. Net annual burden = 300,000 - 60,000 = $240,000. Over 10 years the total burden = 240,000 x 10 = $2,400,000, before counting the interest on the money tied up in the building.Case study
Seen in the real world.
Baxter and Rowe is an illustrative, fictional design firm that moved into a landmark office tower with a ten-year lease at $900,000 a year. The firm expected to double its staff, but only grew by 10%, so most floors sat empty.
The finance director calculated that the firm needed only 40% of the space, which meant 60% of the lease, or 0.6 x 900,000 = $540,000 a year, was wasted. Over the remaining eight years the unused space would cost 540,000 x 8 = $4,320,000.
The company negotiated to sublet two floors and eventually bought out the lease on a third for a one-off payment. The illustrative lesson is that a white elephant should be confronted early with numbers, because the loss rises every year it is ignored. The firm also added a post-completion review to its approval process, so every major commitment is compared with its promised returns two years later.
Watch out
Common mistakes.
- Focusing on the purchase price and ignoring the ongoing costs that follow it.
- Holding on to an underused asset because selling would show a loss, when the loss is already real.
- Assuming demand will rise to fill a large asset without any evidence or plan.
Questions
People also ask.
Is a white elephant always a physical asset?
No, it can also be a project, a software system or a long-term contract that costs more than it delivers.
How can a business avoid one?
By testing the demand, estimating total running costs before approving the spend, and setting review points with clear exit options.
What should be done with one that already exists?
Options include selling, leasing, sharing, converting to a new use or writing it down and cutting the running cost.
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