Cost of Delay

What is Cost of Delay?  Why is it the “one thing” to quantify? How can I get started with Cost of Delay?  How do I quantify the Cost of Delay for my initiative/project or feature?  

What is Cost of Delay?

Cost of Delay is a way of communicating the impact of time on the outcomes we hope to achieve. More formally, it is the partial derivative of the total expected value with respect to time.

Cost of Delay combines urgency and value – two things that humans are not very good at distinguishing between. It should matter to us to know not just how valuable something is, but how urgent it is. The value that we miss out on when we deliver slowly or “late” can be enormous. It is often far more valuable to get something even a week earlier than it is to make it slightly cheaper to develop. These trade-offs are simply not obvious though, unless we understand the Cost of Delay.

Put simply, Cost of Delay is a way of communicating the impact of time on value. This short video (3 mins) explains why Cost of Delay is so important in Product Development:

 

Why is Cost of Delay the “one thing” to quantify?

Don Reinertsen states clearly that “if you only quantify one thing, quantify the Cost of Delay”. The value of quantifying Cost of Delay becomes obvious when you look at how we typically optimise our systems for Product Development. For instance, here is a fairly typical value stream map for a feature being delivered by a software team:

value-stream-map

Seems crazy, doesn’t it? The things is, if you were to track the time spent adding value versus the time spent waiting in your organisation you will almost certainly find something similar. It is very rare to see a Process Cycle Efficiency of more than 20%, which means the end-to-end cycletime is dominated by waiting time.

The cost of queues

In the value stream map above, the Cost of Delay for this feature turned out to be worth over $200,000 per week! The 38 weeks that this opportunity spent waiting in various queues cost the organisation nearly $8m in lost revenue. Knowing this puts the cost of waiting into perspective, doesn’t it? If they had taken the 5 minutes needed to work out the Cost of Delay for this feature and communicated it then a number of decisions would have been made quite differently.

It’s one thing for an organisation to be blind to queues. It’s another layer of blindness to have no clue what those queues are costing. We need to understand the Cost of Delay of the things flowing through the system.

Optimising for speed

Most organisations tend to focus predominantly on the efficiency of the parts of the process, not the speed of the end-to-end delivery of value. For instance, it is normal to find approval and funding processes that are optimized for the efficiency of those doing the approving, seriously impacting the speed and efficiency of the whole system.

Part of what drives this is that we have a really poor understanding of how much the delays are actually costing us. For that, we would need to to understand the Cost of Delay. It gives us a language (and quantifies) the cost of all these queues. Deprived of information about value and urgency the system will optimise for other things.

Value AND Urgency

Understanding Cost of Delay helps us to make better decisions. For that we need to understand the value of the things we are working on AND how that value decays over time. Only then can we understand the cost of queues and all the waiting.

You may hear a lot of people talk about Cost of Delay, but it’s not always clear what people actually mean. Some talk about it in terms of urgency profiles alone, or worse, a nonsensical formula. Unfortunately, this boils the essence out of Cost of Delay, watering it down to something much less useful. What you don’t often see is people attempting to actually quantify it.

You may also observe people wrongly thinking it is simply a different way of prioritising – but that’s only one of the reasons why you might want to quantify the Cost of Delay.

Not just about better prioritisation!

When developing new or improved products and services, understanding the Cost of Delay helps in three main ways:

  1. Better Decision-making – by making the economic trade-offs visible. These trade-off decisions are an inherent part of the creative process, where we desperately need fast feedback about what works and what doesn’t. There are also lots of trade-offs at the system level, where understanding the Cost of Delay is a key part of managing the flow of work.Whether it is experimenting with WIP limits, controlling the length of queues, optimising batch sizes at various points or trying to work out appropriate levels of capacity utilisation, Cost of Delay is the one piece of information you really need.
  2. Better Prioritisation – by using CD3 (Cost of Delay Divided by Duration) we deliver more total value. We don’t have an infinite capacity to develop everything we want, so we have to control the demand somehow. We need to decide where to start, what order we should do things in, and perhaps most important, when to stop and move on to something more valuable and urgent. If you want to move on from prioritisation by gut-feel, you need the Cost of Delay.
  3. By changing the focus – from efficiency and cost (which encourages the wrong behaviours), to speed and value. It’s no good asking people to not do something (like estimating cost or delivery dates) if you don’t give them a viable alternative that actually helps them. By talking in terms of Cost of Delay, you get more of what you want and less of what you don’t.

How can I get started with Cost of Delay?

The benefits of quantifying Cost of Delay should hopefully be clear, but you may want to start with a more simple qualitative assessment, just to gain some familiarity with the concepts without the fear that is often associated with numbers. For that we would recommend starting here: Qualitative Cost of Delay. (Don’t stop there though, as most of the benefits described above only really happen when you quantify the impact of delay.)

If you’re ready to take on that challenge and want to quantify the “one thing”, Cost of Delay, here is your best starting point: Four Steps to Quantifying Cost of Delay.

Lastly, if you have a question, comment, or would like some help with Cost of Delay, feel free to drop us a note below. We’d love to help.

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