In order to understand the urgency of ideas, we need to understand the life-cycle of benefits, and the effect of being late. The effect of delay can be different depending on what the type of benefits are, and whether there is any influence from the wider market. The two main variables to consider are a) the length of the lifecycle of benefits (how quickly the benefits ramp up and down) and b) whether the peak is affected by delay or not.
1) Short life-cycle; Peak affected by delay
In some cases the life-cycle of benefits is relatively short. Benefits ramp up to a peak and quickly decline again. Sometimes this is because the value-add quickly becomes standard for customers (rather than “delighting”). This is common in consumer electronics, where the feeds and speeds that are top of the line and differentiating today will be bargain basement stuff in months rather than years. In other examples, the market is always creating new alternatives, moving on quickly to the new “new thing”. The fashion industry is a good example of this, which is why Zara competes by having very short lead-time from spotting the new look on the catwalk, to on the hangers in the store.
With these types of benefits, if you are late, the peak benefits are affected, as shown below.
2) Long life-cycle; Peak affected by delay
Another urgency profile is where there is a first-mover advantage, making it difficult for latecomers to recover position. This can be due to barriers to entry or the advantage that scale can bring. Extreme examples of this might be cola-flavoured soft-drinks, PC operating systems and other products or services for which the market consolidates down to one or two major players. These products benefit from some form of preferential attachment mechanism or “network effect”.
3) Long life-cycle, peak unaffected by delay
A third urgency profile is where the lifecycle benefits are long-lived. Benefits ramp up to a peak, and are sustained over a long period. In most established organisations this is the most common urgency profile you will find. A typical example is where we are automating a process or improving efficiency, reducing time or cost. The ramp up and peak of benefits is effectively the same, whether the solution is late or not. This is also the easiest urgency profile for which to calculate the Cost of Delay, as it approximates nicely with a simple parallelogram.
An example, to illustrate:
Example 1: Automating a process
This new feature is required to automate part of the invoicing process in order to improve invoice accuracy. The value of improving invoice accuracy is expected to come from:
· Reduction in number of customers paying late, providing cash that can be invested elsewhere and reducing the Accounts Receivable Turnover. This is estimated to be worth an additional $4,000,000 per annum, categorized as “Increase Revenue” benefit type.
· Reduction in number of calls currently costing about 5 FTEs at $20k per FTE. This is worth $100,000 per annum and categorized as “Reduce Cost” benefit type.
Total benefit gained from this feature is equal to $4.1million per annum. Delaying this requirement by 1 week is worth ~$79,000 per week.
If the feature were available now it would be generating ~$79,000 per week. If this feature was delayed by four weeks then the Delay Cost incurred is calculated as $79,000 times 4 weeks which adds up to ~$316,000.
4) Impact of External deadline
Where requirements have a specific deadline the Urgency Profile is slightly different. The benefits profile itself can look like any of the above three, but the benefits only ramp up around a certain date. As a result, the Cost of Delay is zero until the point where you need to start development – to avoid incurring any delay cost.
For example, consider a product or service oriented around a specific seasonality. Let’s say you’re in the business of selling Christmas cards. Sales for this product only start in late November, reaching a peak in mid-December before dropping off a cliff in the last few days before the 25th. In this case, the benefits life-cycle is short and the peak is affected by delay, so it looks something like the curves shown in 1) above. Where it differs is that the date at which you need to have a product ready to go to market is relatively fixed.
Another extreme example where the benefits have an extremely short life-cycle and a peak that is affected by delay might be something related to a single-day event, like Red Nose Day: if you’re building functionality for processing donations faster, it had better work on the one day in the year that donations are flooding in.
To calculate the point at which the Cost of Delay kicks in, we need to consider the likely lead-time, ensuring that the solution is delivered just-in-time, rather than too early or too late. Here’s an example, but with a long benefits life-cycle, and peak unaffected by delay:
Example 2 – Impact of an external deadline:
There is a new regulation that will be effective from 1st of December 2013. As of December, front-office staff will need to prepare extra documentation in order to meet this regulation. This requirement is to automate the new documentation process so that the front-office employees can produce the documentation automatically.
The requirement will avoid the additional manual processing resource, which is estimated to cost about 20 FTEs at $20k per FTE. The benefit type is categorized as “Avoid Cost”.
20FTE x $20k= $400,000 per annum => $0.4m/52 weeks = $7,692 per week
Let’s say it is 1st of June 2013 right now, which means we have got 5 months to do something about this requirement. It’s going to take about 13 weeks to deliver this new feature. If we start developing the solution now it will be delivered in September, but we don’t need it until December.
We deal with this by calculating when we need to start developing the solution by subtracting the duration from the external deadline. In this case we need to start development by the 1st of September at the latest (13 weeks before the external deadline of December 1st).
Before the 1st of September: Cost of Delay is $0 per week.
After the 1st of September: Cost of Delay is ~$7,700 per week.
Hopefully the discussion of these profiles provide some help when considering the impact delay can have on value. If I’ve missed anything, let me know.