COST OF DELAY

The very first step to understanding

why your product development
organisation is losing millions

®
Introduction

As your team or organisation embark on the lean methodology, one of the

biggest realisations you’ll have is that delays can seriously impact the value
you provide to your customers.

Not only that. Delays can also cost your business thousands, if not millions of dollars in
potential revenues.

Thus, understanding the cost of delay and how to calculate it gives your business an
edge in product development.

Defined as a way of communicating the impact of time on the outcome of projects, the
cost of delay is a key metric for product development.

For example, if your agile team is confronted with several product feature requests and
you can only take on so much at once, knowing which request to prioritise is very much
important. There are so many methods for prioritising tasks. But none is as effective as
Cost of Delay (CoD).

Cost of delay makes decision-making simple and easy by helping businesses prioritise
projects with the highest monetary value. While there can be so many aspects to look
at – such as the impact of the project, the availability of resources, customer demands,
etc; there is no metric that is as powerful as the monetary value of a product request.

Cost of delay is a simple framework that can benefit an agile organisation big time.
There are only four steps to determine a project’s CoD. In this guide, learn about Cost
of Delay as a lean management process and how you can implement it in your
organisation so you and your team can make decisions that will drive growth and
revenues for your business.
Understanding the
Cost of Delay

Many organisations struggle with waiting for a long time to get things done. A reason for
this is not that the actual actions needed to complete the task take a long time, but because
most of the time, multiple projects surface and stay in the queue without anyone noticing
the gravity of the delay.

Unfortunately, many organisations are blind to queues. More often than not, simple
product development projects, for instance, adding a new feature on a website or
redesigning the home screen of an app, can be completed in just one week. However, due
to a long list of backlogs, such a project can take several weeks, worse, months.

Cost of delay is a lean process that helps organisations decide

which projects to prioritise in terms of financial value. Why?

Basically, backlogs can lead to a significant reduction in a company’s revenues. In the eyes
of consumers, product features may all seem equally important. Thus, a change in the
website interface, for example, is as beneficial as the addition of a blog page or an update
in the product images. However, such features don’t have the same level of worth. Some
features are more expensive than the others and can take a longer time to implement. The
cost and time are two major resources that every business considers when determining
which product features to prioritise.

This is where the concept of “cost of delay” makes perfect sense. As the term suggests, it
refers to the monetary impact of delays in projects. More formally, it is described as the
total expected value of a product development feature with respect to time.
 More simply, cost of delay answers the question “What would it cost
your company if a certain project is delayed in four weeks?” or “How
much can your company gain if it can be done one month earlier?”

How to prioritise features is an important decision to make by any product development

team. There are a variety of frameworks used by organisations from various industries. Some
companies base it on business value and the complexity of implementation. Others base it on
“customer delight” relative to the potential investment needed to improve the feature while
the rest give more emphasis on the price of each potential feature.

But according to Don Reinertsen, a renowned Product Development Consultant and Author,
cost of delay should be the “only thing" to quantify. He describes it as the “golden key” to
many opportunities that have the power to transform the mindset of a development
organisation.

Cost of delay, according to Reinertsen, encompasses the cost of

queues, the value of excess capacity and variability reduction, as
well as the benefits of having smaller batch sizes. It answers
questions like “How much money can you make if you can speed up
the product development process?” or “How much can you lose if
you launch it 60 days late?”

This framework takes into major consideration the time a product feature has to stay on the
queue before it gets published and how much it would cost a business. Cost of delay helps a
company determine which feature would hurt them the most, financially, if it will be delayed.
Thus, it sets a clear guideline on which project to prioritise.

https://luis-goncalves.com/how-to-calculate-cost-of-delay/
https://www.productplan.com/strategies-prioritize-product-features/
http://leanmagazine.net/lean/cost-of-delay-don-reinertsen/
 Elements of
Cost of Delay

How does a business determine the cost of delaying a project or not doing it
at all? And how do they decide on what to do next? In his book Principles of
Product Development Flow, Reinertsen discussed the three elements of cost
of delay which should be taken into major consideration by any development
team or organisation.

User Business Value Time Criticality There are too many

Design sprints are focused the impact of delays to
on answering very specific deadlines, regulatory
questions that the requirements, user trust,
company or organisation etc. It also indicates the
doesn’t have an obvious importance of doing a
answer to. project now.
problems that need to be
solved at once.
Design sprints run for only
five days. The Scrum Team
can’t possibly cover all
problems in just a short span
of time.

Adding these three, you determine the cost of delay of a project.

Weighted Shortest Job First

When deciding which projects to prioritise, Reinertsen suggests that when it comes to the
project size, the smaller the better. And when it comes to value, the higher the better.

To make the decision easy, he introduced a model that can help development teams
decide which project to prioritise. He called it the Weighted Shortest Job First (WSJF).
This technique takes into account the cost of delay (COD) and the size of the project to
determine a relative ranking of a product feature.
 User Time Risk Oportunity
Business + Criticality + Reduction Enablement
Value Value
WSJF =
Job Size

Photo credits: https://www.leadingagile.com/2017/06/cost-delay-project-management-2/

The WSJF model undoubtedly helps a scaled agile project team to

determine what story to work on first and at the same time, helps the
company figure out which product development initiatives to prioritise
in terms of funding.

http://agilebuddha.blogspot.com/2014/02/5-steps-for-using-safes-weighted.html
https://www.leadingagile.com/2017/06/cost-delay-project-management-2/
https://techbeacon.com/app-dev-testing/prioritize-your-backlog-use-weighted-shortest-job-first-wsjf-improved-roi
 Importance of
Cost of Delay

Understanding the cost of delay has significant benefits to any business.

Higher Profits

Time is money. Completing a project past the deadline can substantially cause financial injury to
an organisation due to deferred income and lost sales. While big companies can absorb the
costs associated with delays in projects, startups and small businesses can greatly suffer and in
worst cases, may not be able to recover anymore. Additionally, a project that still runs through
even after the expected due date still incurs a cost. In addition to the supplies, materials, and
equipment, the cost of prolonging a project also includes include employee benefits, office
space, and administrative costs.

As mentioned, when it comes to the cost, each project is different. Thus, by utilising the cost of
delay, a business can determine which product feature they will benefit the most if done the
soonest. It sets a clear guideline on what projects matter most by taking into account the time
and money that might be lost if they are delayed.

There are so many approaches for determining which projects to prioritise. Some managers
utilise opinions, others base it on the fund allocated to their team or department, and others
make priorities based on the opinion of the highest-paid person in the organisation.
Unfortunately, none of these popular methods work. As a matter of fact, they can even backfire.

Cost of delay is a well-accepted process for product development because it eliminates flawed
decision-making. For one thing, COD is not based on opinions (which can be very biased). It is
based on facts, data, meaningful insights, figures, and calculations that eliminate guessing
games and provide an agile team a clear direction in making important decisions.
 Strategic Allocation of Resources

Queues exist in most organisation. These are projects that are sitting idle, waiting to get the
attention of the teams assigned to it. Most companies know they exist, but only a few know how
long the work is being delayed and how much it is costing them. Calculating for the cost of delay
gives leaders and stakeholders a clear understanding of how much these queues are financially
hurting their organisations, therefore, helping them create a strategic allocation of funds and
resources for each pending project.

Smart Trade-off Decisions

When making trade-offs, there are different factors to consider, such as project budget,
schedule, product cost, and sales performance. For example, is it more beneficial to work on a
project that increases company sales by 3% but delays the product launch by a month? Cost of
delay is one of the variables that can help managers make better, faster decisions.

What counts as cost?

Before proceeding with the calculation, it is essential to know about some categorisation of
costs whenever there is a delay in the implementation of the project. There could be several,
but in most cases, what counts as cost are the extended labour cost and opportunity cost.

Here’s an example.

Suppose you’re a startup that plans to build a piece of software. After planning the specifics of
the project, you assumed that it will take 2 months before you can roll it out to the market. So,
you assembled a production team to work on the project. But for some reason, it took 3 months
to build the software. And now, you ended up paying your staff 33% more than what you
initially planned. At the same time, your staff spent 33% more time on one project, which
prevented them from working on the next ones. Both of these are significant labour costs,
which can tremendously hurt your finances. And remember, this scenario is for just one piece
of software alone. What if you have to build a dozen?

Aside from the labour cost, your company also loses money on potential sales. Suppose your
new tech product is projected to produce $4,000 sales weekly, a month of delay means that
you will lose $16,000 worth of sales.
 Cost of Expediting Processes

Aside from product development initiatives, there are projects that meant to expedite workflow,
maximising the use of time, resources, and manpower, thus, leading to a reduction in expenses
and an increase in your profit. Some examples might include:

Automating repetitive tasks.

Implementing some type of cloud solution to streamline workflows.
Using a project management platform

Whatever these projects are, they are designed to make doing business less expensive. For
example, automating tasks can save you tens of thousands in labour and material costs.

Apart from a direct increase in sales, there are other forms of opportunity costs. For example, the
following updates can make the user experience better, such as:

An improvement in your website that will increase traffic and lead generation.
An added feature that makes your existing product even more desirable for your target
customers.
Adding a new demographic.

Put simply, these are initiatives that when completed, will bring more money to your business.

Expected Monetary Value

In product development, there is always a room for uncertainties. Will adding a specific feature
lead to an increase in sales? Is it worth spending money on additional resources? What are the
risks if you eliminate an old process? When the success of such decisions is not guaranteed, a good
measure to look at is the Expected Monetary Value (EMV).

Mathematical analysis has significantly changed product development for the better. With
mathematical and scientific models like the EMV, businesses eliminate the risks associated with
making decisions based on opinions or gut-feel. While no model can predict the success rate of a
decision with 100% accuracy, the more data-driven an organisation is, the better the decisions
they will make.

When calculating the EMV, we follow this formula:

EMV = POS * G – C

Probability of Success (POS)

successful (G)
 Quantifying Cost of Delay

When prioritising projects based on the cost of delay, there are two things that have to be factored
in: value and urgency. Calculating the cost of delay may appear like a complicated process, but it’s
not. In fact, it only takes four steps.

List down all requests.

First of all, you need data. Before calculating the cost of delay, mark down your requests. Include
the time it takes to process each request and the expected value. Using this data set, you can now
compute for the Cost of Delay Divided by Duration, also known as “CD3”. To get the CD3, divide
the request value by the duration, and divide the answer by 1,000.

Outline your options.

List your options when it comes to tackling the backlog. Usually, requests can be categorised under
the following order of priority:

No priority: Requests are done all at once.

Duration priority: Requests with the shortest duration is prioritised.
Value priority: Requests with the highest value are completed first.
CD3 priority: CD3s with the highest value is prioritised.

Compute the cost of delay.

Calculate the cost of delay per option.

Choose the order of prioritisation that has the least cost of delay.

There are different ways to compute the cost of delay.

Projected Revenue after Launch

One of the easiest ways to calculate the cost of delay is by simply estimating the projected revenue
after the product feature has been launched. For example, an update with your tech product is
expected to raise your weekly profit by $2,000. Thus, if the product development is delayed for a
month, your company loses $8,000. In addition to the projected sales, the delay in the project also
incurs more cost on salaries, resources, and tools.
 Cost of Delay Divided by Duration (CD3)

When requests vary in time and value, it can be difficult to determine which has the least cost of
delay. In this case, CD3 method is the way to go. A higher CD3 means that the ROI is quicker, thus,
prioritising the said request makes more sense.

Backlog Cost of Delay Per Duration CD3

Week
Request A $1,000 2 weeks $500

Request B $2,000 3 weeks $667

Request C $3,000 1 week $1,000

Based on this table, the last request (C) should be given the highest priority.

Lost Month Cost (LMC)

The Lost Month Cost indicates the period wherein the product sales are at their peak before it goes
down. This is calculated by multiplying the product margin to the sales volume of the peak month.

How Many Dollars are You Losing Each Week?

Understanding the cost of delay over the product cycle is a critical step towards making better
business decisions.

In the product life cycle, there are two major variables – the product launch and sales ramp-up
period. In general, the rate at which sales increase is nearly the same whether the product has
been launched early or late. However, the later the launching is, the lower the sales peak will be.
There are many possible reasons for this.

One, while the product is not yet launched, competitors may be already out there advertising,
reaching out to customers, and winning them over. And as those satisfied customers developed
brand loyalty, they are less likely to turn to other products, even if the product they are purchasing
is inferior in quality.

Two, with each passing week that a product is delayed, a business loses the opportunity to win
customers over.

Three, the product or product feature launched might be seasonal or event-driven. Launching it
too late can certainly lead to lost sales as the product buzz or hype has gone down.
 The Total Cost of Delay

The total cost of delay is determined using this formula:

Total COD = Lost Month Cost + Peak Reduction Cost

https://leankit.com/learn/lean/cost-of-delay/

Qualitative Evaluation of Cost of Delay

There are instances when a qualitative evaluation makes more sense than the quantitative
approach. It takes more effort and creativity, but it’s certainly a great way to determine which
projects or requests to prioritise.

When doing a qualitative evaluation of CoD, there are two important variables to look at – urgency
and value.

Many companies struggle with distinguishing the two. But for effective prioritisation, and for an
agile organisation to make winning business decisions, there’s a great need to understand how
valuable and urgent a request is.

A simple way to present this approach is through the 3X3 matrix:

Qualitative Cost of Delay

Value

Urgency
Value and urgency are two different things but many project managers tend to
think of them as the same. There’s a common notion that things that are urgent
are valuable and vice versa.

But when it comes to the cost of delay, they are not. It is important to remember that
urgency is independent of value.

On this graph, “value” is placed on the vertical axis and urgency is on the horizontal axis.
In the qualitative approach, instead of the values, more descriptive terms are used. For
example, instead of rating the value using a scale of 1-10, the following remarks can be
used:

Meh – this represents the lowest value. These are requests that are still important for
the organisation but customers will not rave about, such as maintenance stuff.
Additionally, these are product features that are necessary but not really exciting.

Bonus – this represents the middle-value spectrum. These are the delightful things
that customers will surely be excited about and rolling them out will lead to an increase in
the company revenues or probably a reduction in costs. They are necessary to continually
attract the interest of our clients and are perhaps worth writing a press release about.

Super! – this represents the band of requests or projects with the highest value. These
are super important that any delay in launching or development can cause the company
significant loss, either in costs or potential income.

After determining the value, it’s time to rate the project based on urgency. As for the value,
more descriptive terms are used instead of numerical scales. Examples are “Soon”, “Right
Now”/ “ASAP” or “Whenever”.

The qualitative approach can also be used to rate ideas and initiatives. Aside from knowing
what project needs to be prioritised, CoD can be applied to many other scenarios, such as
when there’s a need to spend more money to expedite a process, add a new feature and
delay the product launch, or pull up more resources.

Super!
Bonus
Meh
Types of Cost of Delay

The cost of delay can be analysed in several ways.

Standard Curve
Cost of Delayu

Time

The cost of delay In this type of CoD, a project grows linearly with time. Only the value is
given importance. The Standard Curve is the easiest approach to calculating the cost of delay
because it does not change with the duration. an be analysed in several ways.
 Fixed Date Curve

Cost of Delayu

Time

In this type of CoD, the project is tied to a specific deadline which means it cannot be delayed at
a later time or it will no longer be doable or practical if completed past the due date. For example,
an additional feature in the software is scheduled to be launched in time for the Christmas season.
In this case, the computation of the CoD is a little more complex because, during the first weeks
of CoD, the cost grows at a moderate rate. However, as the due date approaches, the cost gets
significantly higher and after that, it goes back to a small growth rate.

Urgent Curve
Cost of Delayu

Time

This is applicable to urgent requests. For example, you need to come up with a product to
match that of your competitors. Projects such as these have high costs of delay as the
deadline approaches and continue to increase over time.
 Intangible Curve

Cost of Delayu

Time

The Intangible Curve covers low-priority projects, which means, doing them at a later time
does not lead to significant increases in the cost as there is a little risk when these projects
are delayed. Despite being low-risk, these requests still need to be done because they are
still important. There is also a possibility of their costs getting bigger in the future.

Urgent Curve
Cost of Delayu

Time

These are projects that need to be done immediately in order to provide value to your
business. The CoD goes up really high during the deadline week and grows a little over
time. An example is when a competitor will have a product launch really soon and you
don’t have much time to create a product to match it.
 Implementing Cost
of Delay in Your
Organisation

Incorporating cost of delay in your business process can be a lot of work. But there
are certainly ways to make it happen.

Create a Project Economic Model spreadsheet.

At any given moment, you will find a multitude of projects that need to be completed. One
of the reliable project selection models is the Economic Model. Through this, you compare
projects based on their economic value and prioritise the most viable project. To facilitate
this process easier, use an economic model spreadsheet.

Keep note of your monthly sales forecast.

This means extra work (if you are doing your sales forecast annually), but it’s definitely going
to give you better insights and data needed to compute for the cost of delay.

Discuss with your finance, sales, and marketing teams.

The sales forecast should be discussed with these teams for better insights. There are
several questions that need to be asked, like what happens if the product is launched at a
later date or of the sales decline will also be delayed. People from the sales, marketing, and
finance teams need to have a buy-in of project prioritisation so they could align their
initiatives to whatever decision you come up with.

Promote the use of an economic model on any prioritisation decision.

Whether it’s about determining which product feature to launch first, expediting a process,
or implementing a new one, it’s a good practice to conduct economic analysis before making
conclusions or decisions.

Define a minimum ROI for decisions.

Cost of delay is a powerful tool that helps companies protect their purse against potential
profit loss. It is always helpful to establish a minimum ROI (return of investments) before
making any prioritisation decisions.

Develop a baseline model.

Some key considerations for a baseline model are pricing trend, unit sales (market size X
market share), dollar sales (unit sales x unit price) unit cost trend, project operating
expenses, and cumulative (profit before tax). Make your baseline model as simple and
straightforward as possible. If your staff does not understand the model, they are less likely
to let it influence their
 Summary

Cost of delay is a lean process that helps organisations decide which projects to prioritise in
terms of financial value. It has three important elements: User Business Value, Time Criticality,
and Risk Reduction and/or Opportunity Enablement Value.

When it comes to the project size, the smaller the better. And when it comes to value, the
higher the better.

Understanding the cost of delay has significant benefits to any business, such as

Higher Better Strategic Smart Trade-

Profits Decisions Allocation off Decisions
of Resources

When prioritising projects based on the cost of delay, there are two things that have to be
factored in: value and urgency. Calculating the cost of delay involves four major steps:

Listing down Outlining your Calculating the Choosing the order

all requests. options. cost of delay. of prioritisation
that has the least
cost of delay.

When prioritising projects based on the cost of delay, there are two things that have to be
factored in: value Cost of delay can also be determined through a qualitative evaluation using the
3X3 matrix. The complexity, duration, and urgency of projects affect the type of CoD approach
that will be used.

Implementing CoD in your organisation is easier by creating a Project Economic Model

spreadsheet, keeping a note of your monthly sales forecast, and keeping your finance, sales, and
marketing teams in the loop. Furthermore, you need to promote the use of an economic model
on any prioritisation decision and define a minimum ROI for decisions.

Cost of delay is a great tool for any organisation that follows the lean management framework.
Hopefully, you’ve got everything you need right here to get started.
 Cost of Delay is just the
beginning of the journey

Cost of Delay is a great tool, but we think it's not enough for your company to know which projects
to prioritise to save you tons of money. What your organisation needs is a holistic approach to drive
strategy, alignment, knowledge sharing and speed to the market in order to grow and scale your
organisation successfully.

Optimise Flow and Reduce Complexity

by Creating Products
Strategic
Objectives Product1 Product 2 Product N
Team 1 Team 2 Team 3 Team 1 Team 2 Team 3 Team 1 Team 2 Team 3

Strategy Product Owner Product Owner Product Owner Product Owner Product Owner Product Owner Product Owner Product Owner Product Owner

Company
Scrum Master Scrum Master Scrum Master Scrum Master Scrum Master Scrum Master Scrum Master Scrum Master Scrum Master

Developers Developers Developers Developers Developers Developers Developers Developers Developers

QA Engineers QA Engineers QA Engineers QA Engineers QA Engineers QA Engineers QA Engineers QA Engineers QA Engineers

User Experience User Experience User Experience User Experience User Experience User Experience User Experience User Experience User Experience

DevOps DevOps DevOps DevOps DevOps DevOps DevOps DevOps DevOps

Communities Agile Organizational

of Practice Impediment Impediments
Knowledge Sharing Backlog
Under
Hypoteses Optional Selected OnGoing Revision Done

Achievement

Learnings Quarterly Objectives Alignment

Innovation
Sprint1 Sprint2 Sprint3 Sprint4 Sprint5 Sprint6
Metrics
Team 1
Product 1 Team 2
Team 3
Team 1
Product 2 Team 2
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Team 1
Product N Team 2
Team 3

Bi-Weekly Check-In

“Quarter Goals To Do Doing Done

Delivery & Team 1
Business Product 1 Team 2 Executing
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Team 1
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Team 3

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ORGANISATIONAL
Product N Team 2 MASTERY
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