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.
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