Cost of Delay
"Cost of Delay is the golden key
that unlocks many doors.
It has an astonishing power to
transform the mind-set
of a development organisation.”
– Donald G. Reinertsen
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. To make decisions, we need to understand not just how valuable something is, but how urgent it is.
Why is it the “One Thing” to Quantify?
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 not obvious though – unless we understand the Cost of Delay.
How do I get started with Cost of Delay?
Interested, but not sure how to get started? We’ve done this for lots of different organisations: from Fortune 500 giants like Maersk Line to smaller startups — as well as public and private sector organisations.
To get you started, we’ve written a short four step guide to quantifying Cost of Delay to help you learn the ropes and start applying Cost of Delay in your organisation. If you’re struggling with quantifying value or understanding urgency, you could also start with a simple and easy-to-use qualitative approach, to help you learn the ropes.
A Case Study – Maersk Line
The value of quantifying Cost of Delay really becomes clear when you see it in action. For example, below is a value stream map for a feature that was delivered by a team at Maersk Line:
38 weeks of waiting 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 probably find something similar. In most organisations the end-to-end cycletime is dominated by waiting time.
The incredible cost of queues
In the example above, the Cost of Delay for this feature was actually more than $200,000 per week! So, 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 estimate the Cost of Delay for this feature then a number of key decisions would have been made quite differently.
It’s one thing for an organisation to be blind to queues. It’s another level of blindness to have no clue what those queues are costing. If we’re going to make better decisions, we really need to understand the Cost of Delay of the things flowing through the system.
Optimising for speed
Like most organisations, Maersk was focused more on the efficiency of the parts of the process, than 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. Maersk Line, of course, was the same.
Part of what drives these poor system-design decisions is that we have a really bad understanding of how much the delays are actually costing us. Cost of Delay gives us a language and understanding of the cost of all these queues. Without information about value and urgency the system will optimise for other things, with suboptimal results.
Implementing Cost of Delay alongside other changes at Maersk Line lead to significant improvements in value delivered, end-to-end speed and the quality of what teams were delivering.
These results are evidence that understanding Cost of Delay has (in the words of Don Reinertsen) “an astonishing power to totally transform the mind-set of a development organisation”. The Maersk Experience Report goes into detail at how we we went about implementing Cost of Delay at Maersk (with similar stories from other organisations since).