An Introduction to Cost of Delay

WRITTEN BY Derek Huether

What is Cost of Delay?

Cost of Delay is a way of sharing and understanding the impact of time against forecasted outcomes. It provides the means to calculate and compare the cost of not completing something now, by choosing to do it later.

I was recently watching an episode of Shark Tank. I loved the unfiltered statement from Kevin O’Leary (Mr. Wonderful) toward an entrepreneur seeking an investor in his company.

I’m here to make money!

If you’re a fan of Shark Tank, you’ll notice something about Mr. Wonderful.  He keeps the conversation focused on the money.  When will he get his money back? How many multiples of his investment should he expect to get back? Other investors (and many of our stakeholders) don’t focus enough on the money.  Particularly, what is the cost of delaying the implementation of one feature over another.

Why is it so important to understand?

If you want to save or make the most money, you need to prioritize your backlog… by money.  My colleague Isaac recently wrote something similar in his blog post about how to prioritize work.

One way you can prioritize work by money is by using cost of delay.  Sounds kind of weird, right?  Aren’t we always telling people to prioritize their backlogs by customer value?  When you ask customers (or the business) which features are the highest priority, all too often they say all of them.  (Jim Hayden makes reference to this in a recent podcast, when teams don’t prioritize or limit their work in process.  People are really good at starting things but not finishing them.)  Don’t just ask what is the most valuable. Ask the question, “what will cost us the most, by delaying its delivery?”  That’s really what we’re doing.  We’re not profiting from a feature that is not in production, so therefore, we are losing money every day it’s not there.

If I have 3 features to choose from, each with a different worth to the business and each taking a different amount of time to implement, how do I make the best economic decision on what to finish first?  I use Cost of Delay.

How can I quantify the Cost of Delay?

Step 1 – Compare Features

Let’s put the 3 features in a table and compare them.  I intentionally tried to keep this simple by multiplying the value of the features by $1,000. Imagine what this would look like if your features were worth tens of thousands or hundreds of thousands of dollars?

Duration Value CD3
Feature A 3 weeks $3000 1
Feature B 4 weeks $7000 1.75
Feature C 6 weeks $9000 1.5

Step 2 – Visualize Scenarios

Taking what we have learned in the table of Step 1, let’s visualize different scenarios, showing when we could get a return on our investment, given a choice of priority.

  1. No priority at all. Do all at the same time.
  2. Complete the features that take the shortest amount of time first.
  3. Do the features that are the most valuable first.
  4. Lastly, do the features that have the highest CD3 (value divided by duration) score.

Remember, regardless of our choice of priority, all of the features are done by the 14th week.

Visualize prioritization scenarios of cost of delay

For every week features are not making us money, they are costing us money.
Let’s do some math!

Step 3 – Priority Impact on Cost of Delay

Using the three features we can look at the financial impact of the four alternatives.

All at the same time (No Priority)

If we start all of the features at the same time, we get all $19,000 of value on our 14th week.  For the 13 weeks we are working, we incur the Cost of Delay of all three features: $3000 + $7000 + $9000 per week. Delay Cost incurred is $247,000.

Do the Shortest Job First

If we prioritized based on shortest to longest length of time to complete a feature, it would take us until our 4th week to get our initial ROI ($3,000), until the 8th week until we get our next ROI ($7,000), and not until our 14th week would we get our final ROI (which happens to have the greatest value of $9,000).  For the 3 weeks we are working on Feature A, we incur the Cost of Delay of all three features: $3000 + $7000 + $9000 per week. This adds up to $19,000 per week times 3 weeks giving us a total Delay Cost incurred so far of $57,000.  We then move on to developing Feature B. For the 4 week this takes us to deliver we incur the Cost of Delay of Features B and C: $7000 + $9000 per week = $16,000 per week. So the Delay Cost is an additional $64,000, bringing us to a total of $121,000 worth of Delay Cost incurred so far.  At last, we can start working on Feature C.  Cost of Delay of Feature C is incurred during it’s development of $9000 per week for the 6 weeks it takes to build Feature C. This is another $54,000 of Delay Cost to add to our previous of $121,000 for a total of $175,000 Delay Cost incurred.

Do Most Valuable First

If we prioritized based on most to least valuable feature, it would take us until our 7th week to get our initial ROI ($9,000), until the 11th week until we get our next ROI ($7,000), and not until our 14th week would we get our final ROI ($3,000).  For the 6 weeks we are working on Feature C we incur the Cost of Delay of all three features: $3000 + $7000 + $9000) per week. This adds up to $19000 per week multiplied by 6 weeks giving us a total Delay Cost incurred so far of $114,000.  We then move on to developing Feature B. For the 4 week this takes us to deliver we incur the Cost of Delay of Features B and A: $7000 + $3000 per week = $10,000 per week multiplied by 4 weeks giving us a total Delay Cost is an additional $40,000, bringing us to a total of $154,000 worth of Delay Cost incurred so far.  At last, we can start working on Feature A. incurring the Cost of Delay of A during it’s development of $3000 per week for the 3 weeks it takes to build Feature A. This is another $9,000 of Delay Cost to add to our previous of $154,000 for a total of 163,000 Delay Cost incurred.

Use Cost of Delay Divided by Duration

If we develop the features based on whichever has the highest CD3 score, we would do Feature B first; followed by Feature C; and finally Feature A.  For the 4 weeks we are working on Feature B we incur Cost of Delay of $3000 + $7000 + $9000 per week. Delay Cost = $76,000.  For the 6 weeks we are working on Feature C we incur Cost of Delay of $9000 + $3000 per week. Delay Cost = $72,000.  For the 3 weeks we are working on Feature A we incur Cost of Delay of $3000 per week.  Delay Cost = $9,000.  Total Delay Cost is $157,000.

Summary

How do I get started with actually using Cost of Delay? Surprisingly, doing the most valuable feature first is not the best economic decision.  Next time you prioritize your portfolio, don’t just try to maximize value delivered. Limit your cost of delay.

Priority Method Cost of Delay
All at the same time $247000
Shortest first $175000
Most valuable first $163000
CD3 $157000

Some other sources on the topic:
Wikipedia: Cost of Delay
The Principles of Product Development Flow: Second Generation Lean Product Development
Black Swan Farming: Cost of Delay

15 comments on “An Introduction to Cost of Delay”

  1. Kunal deep

    This observation looks very informative. Great take aways about time management. But I would say a little mention of the methodology and referneces would add more credibility to the argument.

    thanks,
    Kunal

    Reply
    • Derek Huether

      Kunal, thanks for the feedback. I based my blog post off a presentation about economic prioritization by our COO, Dennis Stevens. His presentation was based on the works of Don Reinertsen.

      Regards,
      Derek

      Reply
  2. Matt

    Hey Derek,

    Great post. Recently had a conversation with a group that was struggling with the fact that there was one team and multiple product owners. And the challenge is that work got done based on strength of personality or internal political collateral.

    The advice provided was to get the product owners to establish a common metric to compare the requirements being provided — that common metric is currency and leveraging cost of delay to help vet. It’s not the final point of ranking, but helps set the starting point and in multiple instances take the irrational or emotional aspects of ranking out.

    Thanks for writing this blog, I’ll definitely refer folks over to it!

    Later,
    matt

    Reply
    • Derek Huether

      Matt, thanks for adding your comment. I’ve also seen what you describe. Too often, prioritization becomes an emotional exercise. When people use terms like “it’s nothing personal”, when talking business and prioritizing their project over yours, perhaps they should be the first we put in line to use a mathematical calculation to rank our portfolio. Thanks again!

      Reply
  3. Fredrik

    Derek,

    Isn’t the real problem that you really have no idea how valuable a feature really is before it’s put into production and available to customers, which unfortunately equals already developed? Everything up until that point is guessing. Sure you can do business analysis, customer surveys, marketing research etc. but doing that for all the features you are considering implementing is not feasible.

    Reply
    • Derek Huether

      Fredrik, I think you make a valid point. When I use of the term “Cost” of Delay, I personally use it figuratively and not literally. You’re right, we don’t know exactly the actual worth. But, I do believe we should have an expectation of worth or value of items in our investment portfolio. That said, let’s shift away from the value calculations and instead use some other indicator like risk to our business. We could use indicators like a one for low risk, two for medium, and three for high risk. If we then use those values in combination with time, we’ll still get a similar outcome. With that, we could describe that as “Risk” of Delay. In this case, my goal is to generate a score that would allow us to prioritize our portfolio to mitigate risk.

      Reply
      • David Owen

        Derek, this is spot on! You can also consider your CD3 to be “return” in terms of dollars returned over time expended, then doing the work with the highest returns.

        If you also consider risk or uncertainty, you can calculate the Sharpe Ratio (SR = Return / Volatility), and use that as the criteria instead.

        The Sharpe Ratio also demonstrates that it’s worthwhile to minimize uncertainty, just as it is to maximize return.

        Reply
        • Derek Huether

          David, thank you for the validation. I greatly appreciate it! I’ll admit, I was unfamiliar with the Sharpe Ratio. Looks like I’m off to do some more reading. Thanks for sharing. Awesome stuff.

          Reply
    • Charles Betz

      Feature value can be estimated. See Doug Hubbard, “How to Measure Anything,” or the Maersk case study at blackswanfarming.com.

      Reply
  4. Sundar

    Hi
    Most Valueable calculations should be:
    C first: 6*19000 = 114000
    B next: =4*(7000+3000) = 40000
    A next: 3*3000 = 9000
    Total : 163000
    You considered C again in step-2
    FYI
    –Sundar With best regards

    Reply
    • Derek Huether

      Sundar, thank you for checking my math.
      I’ll run through it again.

      C = 6wks*$9+7+3= $114k check!
      B = 4wks*$7+3=$40k check!
      A = 3wks*$3k=$9k check!
      Total: $163k check!

      I went back to the paragraph I wrote and I see what you mean.
      Thank you! I will fix it right now.

      Reply
  5. Laurent Broyer

    Very Nice Post!

    This présentation is very simple but very powerfull !! Thank you, it makes me understand the full notion of Weighted Shortest Job First developped in the Scaled Agile Frmaework.

    I only have one question : I have made the exercise, and with the “most valuable first” scénario, i found $9000*6 + $7000*10 + $3000*13 = $ 163 000, did i miss something ?

    Best Regards.

    Laurent.

    Reply
    • Derek Huether

      Laurent, looks like Sundar found the same issue in my paragraph. You didn’t miss anything. Actually, you are one of only two people who found the issue! This blog post was RT’d on Twitter quite a few times. Thank you for reading this in detail.

      Reply
  6. Vishwanath

    In the most valuable section you have striked out 64K and added 40K as indicated by two of your readers below but you’ve forgotten to change the features that are contributing to the 40K. The features have to be B & A and not B& C. Thank you for the wonderful post though.

    Reply
    • Derek Huether

      I read your comment several times, checked my math, and shook my head. Yes, you did indeed find an error. I didn’t delete the error entirely. I lined out the original data and added the correct values. I’m not sure why the most valuable, which we all most commonly use, is the one that tripped me up. Still, I appreciate that you read my post in detail and were compelled to leave a comment. Thank you!

      Reply