Cost of Delay

Here is a fairly typical value stream map for a feature being delivered by a software team. If you were to track the value-add and time spent waiting in your organisation you will probably find something similar:

value-stream-map

Seems crazy, doesn’t it? The thing is, most organisations are blind to queues. We 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.

If we are to make better decisions 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. In the value stream 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?

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

  1. Better Decision-making – by making the economic trade-offs visible
  2. Better Prioritization – by using CD3 (Cost of Delay Divided by Duration) we deliver more total value
  3. By changing the focus – from efficiency and cost (which encourages the wrong behaviours), to speed and value

Put simply, Cost of Delay is a way of communicating the impact of time on value. Not just how valuable something is, but how urgent it is. The value that we miss out on when we deliver late, or while waiting can be enormous. It is often far more valuable to get something even a week earlier than it is to make it cheaper. These trade-offs are not obvious though unless we understand the Cost of Delay.

Most cases of Cost of Delay can be easily approximated using the following graph as a guide. It shows the impact of being late for a feature where the benefits are long-lived and the peak benefits are unaffected by delay. There are other urgency profiles, but this is the most common in large organisations.

cost of delay long life peak unaffected

Usually, the ramp up to the peak is the same whether we have it now, or later. By visualising the impact of delay we can easily see that it is the peak benefits that we are delaying. In cases where the peak is also affected by delay, the cost of delay can be even higher, especially if the impairment is permanent.

How to get started

Getting started with Cost of Delay

If you want to learn more about how to do this you can read some thoughts about quantifying value, the value of information, option valueurgency profiles, and using Cost of Delay for prioritisation.

If you are interested in learn about how others have gone about it you may want to read the experience report about applying Cost of Delay across a $100m portfolio at a Fortune 500 company. We also present the before and after results, showing how using Cost of Delay helps to discover, nurture and speed up the delivery of value.

Lastly, to help you get going, you may find this canvas a useful guide for helping to work out the Cost of Delay for your idea, project or feature.

If you would like help with any of this feel free to get in touch!