Prioritizing to Minimize Cost of Delay

What is Cost of Delay?

Cost of Delay is a way of sharing and understanding the impact of time against forecasted outcomes. It provides the means to calculate and compare the cost of not completing something now, by choosing to do it later.

I was recently watching an episode of Shark Tank. I loved the unfiltered statement from Kevin O’Leary (Mr. Wonderful) toward an entrepreneur seeking an investor in his company.

I’m here to make money!

If you’re a fan of Shark Tank, you’ll notice something about Mr. Wonderful.  He keeps the conversation focused on the money.  When will he get his money back? How many multiples of his investment should he expect to get back? Other investors (and many of our stakeholders) don’t focus enough on the money.  Particularly, what is the cost of delaying the implementation of one feature over another.

Why is it so important to understand?

If you want to save or make the most money, you need to prioritize your backlog… by money.

Sounds kind of weird, right?  Aren’t we always telling people to prioritize their backlogs by customer value?  When you ask customers, or the business, which features are the highest priority; all too often they say all of them.  (Jim Hayden makes reference to this in a recent podcast,when teams don’t prioritize or limit their work in process.  People are really good at starting things but not necessarily finishing them.)  Don’t just ask what is the most valuable. Ask the question, “what will cost us the most, by delaying its delivery?”

That’s really what we’re doing.

We’re not profiting from a feature that is not in production, so therefore, we are losing money every day it’s not there.

If I have 4 features to choose from, each with a different worth to the business and each taking a different amount of time to implement, how do I make the best economic decision on what to finish first?  I use Cost of Delay.

How can I quantify the Cost of Delay?

Step 1 – Compare Features

Let’s put the features in a table and compare them.     What we care about is the amount of time it will take to deliver each feature, and the overall value of that feature afterward.

The time to deliver a feature is measured in sprints, and for our purposes I’ll take that to mean 2 weeks.

The value of a feature is can mean an amount saved (for an efficiency improvement) or additional customer value received due to the feature being in production.  That value continues to be delivered for each week after the feature is released.  This number needs to take into account the business value, time criticality, risk reduction and opportunity enablement values, but what matters more is how they stack up against each other and the specific needs of your application.

In general, it’s a good idea to not spend too much time thinking about the exact value of each feature.  Instead, I use a simple comparative value, typically using the Fibonacci sequence to estimate (1, 2, 3, 5, 8, 13, …).

For our purposes here, I intentionally tried to keep this simple by multiplying the value of the features by $1,000.  Imagine what this would look like if your features were worth tens of thousands or hundreds of thousands of dollars?

Donald Reinertsen, in the book “The Principles of Product Development Flow”, suggests we take into account the value delivered when we prioritizem by calculating a “weighted value” defined as that value delivered divided by the time it will take to deliver that value.  We’ll calculate that and show it as well.

Step 2 – Visualize Scenarios

Taking what we have learned in the table of Step 1, let’s visualize different scenarios, showing when we could get a return on our investment, given a choice of priority.

1. No priority at all. Do all at the same time.
2. Complete the features that take the shortest amount of time first.
3. Do the features that are the most valuable first.
4. Weighted Shortest Job First (WSJF) – prioritize by the Weighted Value given above.

Remember, regardless of our choice of priority, all of the features are done by the 15th sprint.

In the chart below, we show how much value is being received while the features are being developed.

For every week features are not completed and making us money, they are costing us money.
Let’s do some math!

Step 3 – Priority Impact on Cost of Delay

Using the four features we can look at the financial impact of the four alternatives.

All at the same time (No Priority)

If we start all of the features at the same time, it slows down development of all the features.  Even if we deliver each when it is done, the first feature (likely Feature A) will be delivered around the 9^thsprint, as can be seen in the first line above. When the first feature is delivered in week 9, we receive an ROI of $8000 each week, which increases until all features are delivered after week 15.

Since our Cost of Delay is the amount of value we have not realized due to features not delivered yet, the Cost of Delay is 47 for the first 8 sprints, 39 (47-8) for the next 3, 34 for the next 2, and 21 for the last 2, for a total Cost of Delay of (47*8) + (39*3) + (34*2) + (21*2) or 603.  If each sprint is 2 weeks and each point of value is $1,000, this is $1,206,000 in total Cost of Delay.

Do the Shortest Job First

When we prioritize based on shortest to longest length of time to complete a feature, it would only take us until our 3^rdsprint to get our initial ROI ($8,000), until the 5th sprint we get our next ROI (+$5,000 for a total of $13,000), and so on.  For the 2 sprints we are working on Feature A we incur the Cost of Delay of all four features: $8000 + $5000 + $13,000 + $21,000 per week. This adds up to $47,000 per week times 4 weeks (2 sprints) giving us a total Delay Cost incurred so far of $188,000.

We then move on to developing Feature B. For the 3 sprints this takes us to deliver we incur the Cost of Delay of Features B, C and D: $5,000 + $13,000 + $21,000 per week = $39,000 per week. So the Delay Cost is an additional $234,000, bringing us to a total of $422,000 worth of Delay Cost incurred so far.   Feature C adds another $34,000 each week for 4 sprints, or an additional for $272,000 Delay Cost, and Feature D adds $21,000 each week for 6 sprints, or $252,000.  Thus the total delay cost is $188,000 + $234,000 + $272,000 + $252,000 or $946,000 Total Delay Cost. 

This is almost $300,000 in additional value received compared with all at once, but we’re not done yet.

Do Most Valuable First

If we prioritized based on most to least valuable feature, it would take us until our 7th sprint to get our initial ROI ($21,000), until the 11^thsprint until we get our next ROI (+$13,000), and so on until we have all ROI after sprint 15.  For the 6 sprints we are working on Feature D we incur the Cost of Delay of all features, again $47,000. This adds up to $47,000 per week multiplied by 12 weeks giving us a total Delay Cost incurred so far of $564,000.

We then move on to developing Feature C. For the 4 sprints this takes us to deliver we incur the Cost of Delay of Feature C, as well as A and B which are also not yet delivered: $13,000 + $8,000 + $5000 per week = $26,000 per week multiplied by 8 weeks giving us a total Delay Cost of an additional $208,000, bringing us to a total of $772,000 worth of Delay Cost incurred so far.  Feature A adds 4 weeks (2 sprints) at $8,000 + $5,000, for a total of $52,000, and finally Feature B, our lowest value feature, adds 6 weeks at $5,000 for an additional $30,000.  Adding all this delay cost gives us a total of $564,000 + $208,000 + $52,000 + $30,000 for a total of $854,000 Delay Cost incurred.

Weighted Shorted Job First (WSJF): Use Cost of Delay Divided by Duration

If we develop the features based on whichever has the highest ratio of value to duration,we would do Feature A first; followed by Feature D, then Feature C; and finally Feature B.  For the 2 sprints we are working on Feature A we incur Cost of Delay of $47,000 per week. Delay Cost = 4 weeks * $47,000 = $188,000.  For the next 6 sprints we are working on Feature D we incur Cost of Delay of $39,000 per week or 12 weeks * $39,000 so  Delay Cost = $468,000.  For the 4 sprints we are working on Feature C we incur Cost of Delay of $18,000 per week.  Delay Cost = $144,000.  Finally Feature B is developed over 3 sprints at a Cost of Delay of $5,000 per week.  Delay Cost =  $30,000.  Total Delay Cost is $830,000.

Summary

How do I get started with actually using Cost of Delay? Surprisingly, doing the most valuable feature first is not the best economic decision.  Next time you prioritize your portfolio, don’t just try to maximize value delivered. Limit your Cost of Delay with a little quick estimation and some simple math.

Some other sources on the topic:

Wikipedia: Cost of Delay
The Principles of Product Development Flow: Second Generation Lean Product Development