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?
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 necessarily 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?
[table border=”1″ width=”400″ colwidth=”100|100|100|100″ colalign=”left|center|center|center”]
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.
- No priority at all. Do all at the same time.
- Complete the features that take the shortest amount of time first.
- Do the features that are the most valuable first.
- 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.
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
When we prioritize 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.
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.
[table border=”1″ width=”400″ colwidth=”150|” colalign=”left|center”]
Priority Method,Cost of Delay
All at the same time,$247000
Most valuable first,$163000
Some other sources on the topic:
Wikipedia: Cost of Delay
The Principles of Product Development Flow: Second Generation Lean Product Development