One challenge that every business face is deciding which project should be prioritised. Would it be in a company’s best interest to embark on a $1 million project that would take three months to finish or a 20-day project that would cost $30,000? Choosing the best option often takes often a lot of time and resources.
Unfortunately, decisions like these can’t be rushed. Which is why companies now are very religious in calculating the Cost of Delay (CoD) and how it impacts their companies specifically in terms of finance.
Understanding the Importance of Cost of Delay
As the name implies, Cost of Delay is the financial impact that a project’s delay will have on a company. It’s how much you will lose (or how big your failure will be) if the project is not finished on a specific date. I published a thorough overview about cost of delay recently, but this time we’re going to delve more in the quantifying its impact.
Here’s a very simplified example of cost of delay – an employee caught in traffic and consequently being late to a critical meeting. Unfortunately, there’s more at stake when it comes to delays in business. It could mean higher labour cost, losing a client, a less than stellar reputation or the release of a substandard product.
How to Calculate Cost of Delay
There are several key components to consider when calculating the cost of delay, like labour cost, the opportunities lost, or the market value of the product or feature.
To determine the cost of delay, you can simply estimate how much revenue the project is expected to bring after launch. For example, your company’s new product has been estimated to have a return of $30,000 a week. So your business loses said amount every week the product’s launch has been delayed. This means a delay of three weeks will cost you $90,000 in revenue. That’s not counting the project team’s salaries, the marketing involved and the hit to your company’s reputation.
Another way to see the damage a delay will cost is to consider Cost of Delay Divided by Duration (CD3). Here are the steps to calculating it:
- Step 1: Calculate the project’s expected profit per week.
- Step 2: Estimate how much time is needed to implement the project.
- Step 3: Divide the revenue by the estimated duration of the project.
The project with the higher CD3 value is considered more critical since it will provide a faster return of investment.
Another way of computing CoD is to follow the formula –
Total Cost of Delay = Lost Month Cost + Peak Reduction Cost
To use the formula, you have to understand how the product life cycle works and the impact of the launch date on the total revenue amount.
The product cycle refers to the rate of sales, which in turn is determined by how quickly the product is released and how fast the sales team is in advertising it to customers, getting them on board and securing sales. However, the later the product is launched, the lower the sales peak will be.
The delay and consequent lower sales peak constitute the peak reduction cost. Unfortunately, determining the exact number of the reduced peak in revenue is not easy.
Meanwhile, Lost Month Cost refers to the peak month of sales. This is the time when sales of the product are consistent or high and before it starts to decline. One easy way to compute Lost Month Cost is to multiply the peak month of volume and the product margin. This month is actually some part of the CoD.
4 Different Types of Cost of Delay
It’s also important to know the different types of Cost of Delay (CoD) as it will have an impact on your computations.
- Fixed Date Curve: As the name implies, this relates to projects that have a fixed and stringent deadline. This means the CoD is connected to a specific time frame. For example, the project will be affected when a new law is implemented or when a TV advertisement is already scheduled to be launched internationally.
Computation of Cost of Delay in this instance is a bit more complicated. Initially, the CoD will grow at a moderate pace. However, the CoD will receive a major boost after a certain time period and will return to a minimal growth rate afterwards.
- Intangible Curve: This pertains to projects with low Cost of Delay. These are usually the projects that have low priority because they have minimal impact. This also means that CoD is virtually static as there’s little or no risk if the project is delayed.
- Standard Curve: The Cost of Delay of a project grows linearly with this type. This is the easiest CoD to compute as it does not change with the duration.
- Urgent Curve: In this type, the project has to be finished and delivered quickly so it can generate value for the company. A delay will result in a huge loss. For instance, your competitor is gearing up for a major product launch and your company has a limited time to react and compete. The Cost of Delay of this type of project will be high from the beginning of the week of the deadline and will just rise over time.
It should be pointed out that the CoD curve of a project can change. For example, one company has released a product using a newly developed, groundbreaking software. Because the company has no competition, the CoD follows a standard curve. However, the project team receives word after a year that a competing company is developing a product with the same features and it will be released in a specific month. The previous standard CoD curve will be replaced by the fixed date curve.
On That Note…
It’s vital for companies to understand what Cost of Delay is and how to calculate it. Knowing the impact CoD will have on a business will give management greater insight on the projects in the pipeline and which ones should be prioritised. This, in turn, will help a company plan out key details like the best team for the work, the logical time frame for the product and the tools needed to finish the project on time.
Successful companies are based on five pillars: the ability to reduce time to market, connecting strategy to daily operations, having an environment of continuous improvement, creating an environment of sharing knowledge and drive innovation. Analyse these 5 areas in your organisation right now to find out how close your organisation is from achieving fantastic results.
Cost of Delay: Learn Why Your Organization Is Losing Millions
It’s inevitable that companies would sometimes have different projects on their plate. The question that a lot of business owners or project managers have to answer is what project they should prioritize. Cost of Delay is a concept that can be used to determine which project should be given a higher priority.
A lot of companies are now taking Cost of Delay (CoD) into account when it comes to projects and running their company. Most people are admittedly confused about this concept as they look at CoD as some mathematical formula that can give exact revenue numbers. Cost of Delay is so much more than that.
What is Cost of Delay?
Cost of Delay is a means of understanding and sharing the impact of time against a projected result. It provides companies with a way to compute and compare the cost of not finishing a project or feature by opting to do it at a later time.
In layman’s terms, Cost of Delay means exactly what the word implies. It is the loss or postponement of a benefit or value because of a delay. For instance, you left home 15-minutes late. This delay led to your being stuck in traffic for more than an hour, which in turn caused you to be late to an important meeting. You can probably imagine what the day’s delays have cost you.
However, the stakes are higher when it comes to delays in business. A delayed project or feature means extended labour cost and lost opportunities. It can also mean the release of substandard products and damaged reputation.
Why Organizations Lose Money Due to Delay
Backlogs in business can cause a drop in revenue. This is why some experts say that if you want to make profit or save money, you have to prioritize your backlog in terms of money.
Bear in mind that each product or project has different features or benefits. Consumers often think all these features are important. But the reality is that each feature takes a different time to create and implement. They also don’t have the same level of worth in the business. Prioritizing one means limiting or delaying the other. And every day that a feature is not in production means another day that the company is not profiting from it.
By utilizing Cost of Delay, the company can determine which feature will cost them the most by a delay in the delivery. It also sets a clear guideline on what projects would matter most for the company and other stakeholders without the friction of other decision making obstacles which bring us to the next point below.
Cost of Delay Eliminates Flawed Decision Making Process in a Company
Are you familiar with the following acronyms and concepts?
” MoSCoW Method (Must have, Should have, and Could have Would have) – An attempt to make qualitative prioritisation based on opinions.
” Equity Model – Prioritizations are based on allocated funds for each department.
” HiPPO (Highest Paid Person’s Opinion) – Priorities are made by the person who has the fattest pay check.
If you’re familiar with all these concepts (and HiPPO reminded you of a loud mouth in your office), then it’s easier for you to understand how flawed and dysfunctional these frameworks of prioritizations are.
The MosCow method often puts everything in the “Must-Have” bucket. Imagine if your company has a limited resource and man power. The quality of work and output will surely suffer. The Equity method could have been a “logical” approach to prioritization because it makes sense to prioritize departments with higher budgets. Unfortunately, an organization operates in a co-dependency environment in which departments affect the performance of other teams. A HiPPo is rarely a reliable framework. This is why we have the old adage that says “two heads are better than one”.
These counterproductive default prioritisation processes of companies can be easily remedied by determining the Cost of Delays. If you put everything into perspective, provide figures, and context to different factors involved in decision process, your company will easily aim at the right directions.
Elements of Cost of Delay
Using the framework of CoD, the company has to determine what delaying or not doing the project at all will cost the company. This is challenging as there’s an undefined financial result. So how can an organization decide on their next step?
Based on what Don Reinertsen wrote in Principles of Product Development Flow, there are three elements to consider in CoD –
- User Business Value
- Time Criticality
- Risk Reduction and/or Opportunity Enablement Value
Reinertsen says that adding those three elements equals the Cost of Delay. He also introduced a model that assists organizations in determining the importance of each project and which one should be given priority. He calls this the Weighted Shortest Job First (WSJF). Essentially, WSJF is Cost of Delay divided by the Job Size.
How to Quantify the Cost of Delay
Now that the parameters and baseline formula has been established, the next step is to assign the value.
What the user has to understand that the values are subject to what the team wants to use. Some use a Fibonacci Scale while others assign points agreed on by the team.
There are several reasons why quantifying the Cost of Delays helps a company:
- It improves the ROI delivered with a limited resource
- It helps manage the demands of several stakeholders
- Assists in making sensible financial trade-offs
- Changes the focus of the discussion from cost and dates to Value and Urgency
Contrary to what most people believe, quantifying the CoD can be easy as long as you remember its three key elements. Start by understanding the benefits or its business value. Then think about the impact time will have on project’s value. Combine all these into a CoD in terms of $/week. Doing this also helps a company test their assumptions regarding the project, thereby reducing the economic risk.
Following these three steps can make quantifying the CoD simpler:
1. Analyze and Compare Different Features
Put three or more features of the project in a table and compare them based on the duration it would take to develop each feature and its value.
2. Envision Various Scenarios
Once you have compared the features, envision different scenarios that show when you would get a return of your investment based on the choice of priority.
Visualize how these features would fare if:
- There’s no set priority. All features are developed simultaneously
- Features that take the shortest amount of time are completed first
- Features that are the most valuable are done first
- Do features in order of how high their CD3 (Cost of Delay by Duration) scores are
3. Evaluate Impact
Evaluate the financial impact of the three features based on the four priorities. You might be surprised by the results. Sometimes you might find that doing the most valuable feature first is not the best choice financially or that doing the feature that can be finished quickly might actually cause delays in the project.
How to Do a Qualitative Evaluation of Cost of Delay
There are circumstances wherein a qualitative evaluation of the cost of delay makes more sense than a quantitative one. This takes more effort and imagination but is well worth it. Like other CoD methods, a qualitative evaluation will also help a company in prioritizing a project and changing the focus of discussion.
Cost of Delay has two key ingredients – Value and Urgency. Unfortunately, people are not very good at distinguishing “urgency” and “value.” But when it comes to making business decisions, one has to understand how valuable something is and how urgent it is.
When using this method, you can use a 3×3 matrix. Value can be placed on the vertical axis and Urgency on the horizontal. Instead of values, you can use more descriptive terms for their values.
Let’s start with Value. Instead of using a Low, Medium, High rating, you can use “Meh,” “Cool,” or “Bodacious”
Bodacious represents the highest value. These are the factors that if we’re successful, we’ll have a bodacious future.
Cool is in the middle range. These are factors that are dependent on the context. For instance, these can be things that our customers love and we want to push them on. With it, our customers will either want to remain with us or pay us for it. In a different context, it can also mean that the feature will provide us with even more revenue.
Of course, Meh is at the bottom of the spectrum. These are features that are still good but not really something too exciting.
Once you have determined the value, it’s time to focus on Urgency. Again, you can use more descriptive expressions like “Right Now,” Soon” or “Whenever.”
Plug all these determinants in your matrix and rate the features or your ideas based on them. This will give you a feel for what the Cost of Delay is in a qualitative perspective.
Delays in a project can be costly so companies have to learn to prioritize. Using the Cost of Delay concept can help in determining which ones to put first in order to maximize profits, business impact, and strategic use of limited resources.
Working with evolution4all
One of our greatest assets is our capacity to work at all levels. We do not offer daily coaching. Instead, we tackle concrete, long-term challenges. Unlike many companies that apply Agile practices “by the book”, we pride ourselves on carefully considering the context in which organisations work – an interesting concept in countries like Germany that have a largely process-driven culture.
At evolution4all we have developed the 9-month “Organisational Mastery” product. This is suitable for companies that require alignment between executive leadership and delivery teams. The aim is to create a coalition that drives change and internal innovation alongside shared knowledge throughout the organisation.
You can read more about Organisational Mastery here.
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We believe that many organizations implementing OKRs are making a big mistake. At the very least, OKRs will not solve the problems companies are expecting them to resolve.
OKR (Objectives and Key Results) is a simple way to align the organization’s goals with its strategy. Companies define their strategic themes, then create Objectives and respective Key Results to align everyone with the most important strategic goals.
The concept is like Management by Objectives; senior managers place their vision on the top, then cascade down to the bottom of the organization as they define their strategic goals, but let’s take a better look at the differences.
OKR and MBO – What is the difference?
OKR is evolved from MBO (Management by Objectives), taking the best practices out of and adding a few on its own. MBO was introduced by Peter Drucker in 1954. Both MBO and OKR are goal-setting frameworks. Their principle is to evaluate and enhance the performance of employees over a period of time. They are however few differences, like the way in which they measure performance, frequency or their end purpose.
Important differences between OKR and MBO
Let’s take a look at the most important differences between OKRs and MBO.
Frequency of review
Companies that use MBO normally perform yearly performance reviews. They set the objectives for employees for the entire year, so the performance is analyzed and the end of each year. The goals are broad.
OKRs have a higher frequency of reviews. Companies set goals monthly or quarterly and are then evaluated accordingly. This allows people make corrections earlier when there is still a chance.
Mode of measurement
MBO scoring models are flexible, they´re open-ended and use both qualitative and quantitative measures.
OKR measurement is quantitative and is precise. OKR rely on SMART goal setting technique.
MBO is strictly confidential as it is done between a manager and his employee. Objectives are set individually for each employee. The performance directly influences compensation.
In OKR, the key results of individual employees are aligned with team and company objectives. There is no confidentiality. The objectives need to be linked together to achieve company goals.
Purpose of review
The main purpose of MBOs is to resolve the compensation of employees based on their annual performance. The focus is always on the individual performance.
Compensation is not affected by the achievement of OKRs. The main focus is to push to achieve excellence.
With MBO, you are expected to achieve 100% or more. If you achieve less, your compensation is affected.
Normally, 60-70% achievement is expected with OKRs. The goal setting should be ambitious, but also realistic.
Everything looks good but…
The OKR method allows every staff member to have a very clear understanding of the company’s vision and mission. Everyone in the organization can create their own objectives to fulfill the company’s strategic goals. Managers can then create their objectives to support the staff goals.
In theory, this is a fantastic approach because society is moving so fast, and we live in a very complex world. Frontline workers are the best people to understand the customer’s needs and fulfill their requirements. Therefore, they should be the ones who create the products that delight customers.
Because they understand the customer’s pains, the team defines their objectives to create great products. Managers can then create their goals to support the line below and so on.
In truth, this practice does not work. In the following section, we will present several reasons why OKRs will not solve the big problems in your organization.
It is very difficult for Executives to give up their power
OKRs require a completely different mindset from management. If OKRs are applied properly, executives must delegate their responsibility to the whole team. Many executives feel like they have lost their power, which is very difficult for most leaders to do.
In many cases, when organizations apply OKRs, they apply the process the in the same format as Management by Objectives: using a Top-Down Approach. But this format does not create value for the organization because the top managers do not understand what the customer’s real problems are. When defining the objectives, they are usually not in alignment with the company’s current reality.
How consultants are selling OKRs to organizations
Another issue we see with implementing OKRs is that many consultants are selling OKRs as the new way for the organization to become Agile. We need to be very careful with this thinking. Implementing a tool will never make your organization Agile if the culture and management style does not change first.
OKRs often create very challenging objectives that cannot be achieved. Consultants defend this by maintaining that reaching 70% of the OKR is a great work. However, optimally, you want to create an environment that encourages employees to achieve 100% of their goals, not 70%. In our opinion, by telling your employees it is OK to achieve only 70% is fostering a culture of underachievement.
In most of the companies where OKRs were implemented, we noticed that people do not reflect on how the OKRs impacted the business. At the end, OKRs just become a checklist for the managers to check if people fulfilled their OKRs.
In summary, we believe that in theory, OKRs could be a great tool. However, in practice, OKRs do not deliver the results they promise. Now you might say “How come when Google uses OKRs?”
That may be true, but let’s face it, your company is not Google! You do not have the same culture or the same developers that Google has. In our opinion, Google can try whatever they want; the result will always be good. Just think about a great football team, the coach can change a couple of players, but the team will still be great.
Most of us believe that copying another company’s best practices is the solution for our problems, but most of the time, this does not work.
So, if OKRs are not the best option; if they do not bring extra value to the organization, what is the alternative? What is the solution?
What should we do instead?
We coach, train, and consult organizations to implement an Agile Portfolio Management. In our opinion, this is a more interesting approach because the leaders in an organization can define their own budgets for strategic projects. Executives can define what projects or products the organization should work on in the next six to twelve months. They can also allow the people working on those projects to create their own “product backlog”.
As part of this process, the organization must list all the ongoing projects and map all the people who will be involved in each project.
This is a huge step that 90% of the organizations do not take. It creates complete transparency in the amount of work that is ongoing in the organization. The process proves that it is not possible to deliver the products as they should be delivered because there are too many parallel things happening simultaneously, and no real focus by the company.
After you identify your revenue streams – the products that are bringing the revenue to your company – it is time to start terminating or stopping the projects that are not directly connected to the strategy of the organization.
You can work on the strategic projects that you believe will add revenue to your company. In most cases, you will quickly learn that you do not have enough people to do everything. You will have to prioritize projects based on their business impact and not some gut feeling.
At Evolution4all, we usually work in three-month cycles to help organizations define the most important goals they want to achieve within the next three months of their Revenue Streams.
The teams provide product backlogs based on the customer’s needs. These goals are structured to define expected revenue, expected cost savings, improvements, and other measures that make sense for the organization.
If you start connecting your vision to your strategy, your strategy to your portfolio, and your portfolio to your products using clear goals for three months, you can create a highly focused organization that delivers its best work to their global market.
At the end of the three months, you can reflect on the business impact your product delivery has made. This is the point where we see most of the companies failing.
Many people talk about Agile Retrospectives, but no one does a “Business Retrospective”. We find this piece is missing in most of the companies. Of course, the scope of this activity differs significantly from a regular Agile Retrospective.
Often, companies produce “stuff”, hoping to get some business benefit out of it. Very seldom do we encounter companies that reflect on the impact that their development has caused the company.
When you apply Agile Portfolio Management, you can perform a business retrospective to find out what you have delivered in the last three months.
When we say three-month intervals, it does not mean that you deliver your product after the three months. It means, you should be delivering every day, every minute, and every second, whenever your organization can deliver. Three months is an interval timeline for when your company makes its public release and analyses the business delivery to the market.
When you implement this process into your organization, you can start analyzing every task your teams perform. By doing this, you will have a better understanding of the impact that your actions and your development have on your business. Then, if you inject the learning and experiments into the next three months, you will start to see spectacular results. Your company will become Agile, Innovative and a Learning Organization.
Did you like this approach? Would you be interested in trying this out in your organization? Well, we´ve got a perfect training tackling this path. Why don´t you look at the Agile Portfolio Training for Leaders? Check for more information here.