Monthly Archives: May 2015

Cost of Delay – Decision Making Framework

“Cost of delay is the language to translate value and impact to our customers into money. “

Cost of delay is the cornerstone of the economic decision making framework, which helps businesses to assess the impact of time on their products and to prioritise their scarce resources on them. Cost of delay puts the tag price on our features and assesses how their value decays over time.

Using cost of delay our discussions shift from the typical labor cost-oriented mindset in which the important topic is what the cost of the feature is to a radically different approach in which we assess the value of the piece of work to do in terms of impact to the business and customers. We model an economic scenario and consider it real when prioritising features or products in our portfolio. Notice that we are replacing gut feeling to using a more scientific model. This model is more adaptable to the complex adaptive system we have to deal with. We arrange experiments and hypothesis using “probe > sense > respond” to learn how the system responds to the stimulus. Cost of delay is a powerful vehicle to harmonise a single vision of the future and to align a common business strategy.

As we have just mentioned, cost of delay is strongly dependent on time and we should depict how time affects product development. @JoshuaJames reflects on 3 different profile life cycle development patterns to describe product development markets.

Short life cycle and sales peak is affected is cost of delay.

Screen Shot 2015-05-18 at 15.25.09

This urgency pattern has a very short life cycle and sales are profoundly affected by delay. Consider for example the challenge to release a mobile game. As soon as the product is released, sales ramp up very fast until reaches a peak. Then, sales progressively begin to decay. Life cycle is very short and peak is affected by delay. Whether we release our product too late, our peak is reduced due to the fact that market is almost covered by other titles. At a certain point, when sales begin to decay we must invest in discovering which features can help to stabilise or increase the revenue. An important characteristic of this profile is that exciting features (Kano model) are quickly copied by competitors and become basic needs future products.

Long life cycle and sales peak is affected by delay.

Screen Shot 2015-05-18 at 15.24.44

This life cycle profile for certain products also reflects a quick growth nevertheless sales maintain over time. In this case, the first company to introduce the product into the market wins the competitive advantage over latecomers. Cars market or competition between airplane manufacturers is good example of this kind of profile.

Long life cycle and sales are unaffected by delay.

Screen Shot 2015-05-18 at 15.25.00

This profile is the easiest one to compute due to profits are sustained over a long period of time. Number of sales is not affected by when the product is released.

Once, we have identified the urgency pattern it is time to decompose value and duration which are both parameters required to compute cost of delay.

The value of the product features was previously introduced here and has to be estimated considering 4 different perspectives:

  • Increase revenue reflects the revenue provided by new-delighted features (KANO model), which attract either new users or current users.
  • Protect revenue are small improvements which current users will not be able to not pay any extra money for.
  • Reduce cost are improvements in our process to deliver value faster.
  • Avoid cost: costs that are not incurring right now to occur in the future unless some action is taken.

Notice that these perspectives might be complementary and the total value is obtained summing these 4 areas.

Let’s take a hypothetical example. A small company that released a successful instant communication tool is researching on the profitability of adding new features.

           Feature: As a User, I want to use voice commands to request the application to dictate messages to the receiver.

Our network of daily active users is 5 millions. Current license price is $10. The marketing strategy is to offer an upgrade worth $5 to current users and hence we expect 10% of daily users to purchase it. We expect our immediate competitors to release their new service in 3 months so we expect to lose 8% of the revenue per month from current active users who would not pay the upgrade every month and 5% value depreciation of the network of users.

Increased Revenue:

We expect 2% rise in new revenues from users who will pay $5 for the new service.

= 2% 5M daily active users * $5 = $500K

Avoid Cost:

Releasing late this feature would decrease 8% of revenue from current users and would devaluate 5% the net value of our network every month. This network is worth $50M today.

= f(g) current users + f(i) network of users

= 8% 5M daily active users * $5 = $2M

= 5% $50M= $2,5M

COST OF DELAY = $500K + $2M + $2,5M $5M

So, cost of delay is the amount of money we will not make whether that feature is not released on time.

Duration

The amount of time required to release the feature or product to the customer is the second factor required to compute cost of delay. Notice that I prefer making statistical analysis about the performance of the system (historical data) rather than estimating duration.

CD3

So far, we have assessed the list of features in terms of value and duration, however, that is not enough to prioritize and maximise the economics. Product development contains features that usually have different value; urgency and duration so standard approaches like FIFO or LIFO are far from optimising economics. Rather we use cost of delay divided by Duration.

As you can see, cost of developing a product or a feature is not considered when prioritising. Why? First of all, Time is the most critical factor because it is irreplaceable. It cannot be replaced or reversed. On the contrary, funds can be obtained through external sources like financial capitalisation. Also, cost is not a good variable to consider when making decisions due to the asymmetric payoff function of product development. Cost is not proportional to the value obtained. Some research points out that only 30% or 40% of our features can provide up to 90% of the value and we usually only consider cost when making economic decisions. We don’t properly deal with variability and it force us to maximise economics by eliminating all choices with uncertain outcomes.

Finally, I have conscientiously removed the option of adding more capacity because its difficulty to scale in certain situations, especially in later stages of development. Most of the times, adding more capacity leads to communication overloads, and more delays.

            “If you bring new people to a product that is late, it’s likely to delay the project even more because of the increased complexity and the need for the team to adapt to its new composition”

Inspect and adapt

As our customer preferences change and competitors adapt their strategy, cost of delay is constantly affected. Our value model needs to be revisited and refined often. Hence, Cost of delay is not a static figure and urgency pattern is a way to create awareness and shared understanding about the economic impact of delays.

How to prioritize

In order to answer to this question, we have a list of features with different value, duration and CD3.

Feature Value Duration Cost of Delay
Feature A $10K 6m $1.6K
Feature B $8K 4m $2K
Feature C $27K 14m $1,92K

The optimal scheduling decision TODAY is to deliver the feature with highest CD3. So, first feature to release would be B, then C and then A.

Next 2 examples are very atypical in software development but it’s worth mentioning them.

When all features have the same value but different duration, very atypical in software development we might use shorter time first (SJF).

Feature Value Duration Cost of Delay
Feature A $10K 6m $1.6K
Feature B $10K 4m $2.5K
Feature C $10K 14m $0.71K

So, optimal selection would be: B, A, C.

When all features have the same duration but different value we might sequence the work to do with high cost of delay first (HDCF).

Feature Value Duration Cost of Delay
Feature A $30K 5m $6K
Feature B $20K 5m $4K
Feature C $10K 5m $2K

Optimal scheduling would be: A, B, C.

Finally, in Flow Product development we measure throughput as the rate at which we convert inventory through sales and value delivered to the customer. Thus cost of delay can be considered a healthy signal of the system. All partially completed features (inventory) are avoiding us reach the goal of making money.

“How much money and time do we spend on features that have not been converted into throughput?

CONCLUSIONS

  • Cost of delay puts a price tag on our features in order to help you maximise economics and prioritise.
  • Cost of delay shifts our mindset from cost and efficiency to speed and value.
  • Cost of delay assesses our value models against urgency, value and risk.
  • Not only Cost but also probability are required to make optimal economic decisions. Cost is not always proportional to the value obtained. Asymmetry payoff function of product development remind us that we need variability to create value and short feedback loops to cut wrong paths as soon as possible.
  • We consider 4 different perspectives to assess value:
    • Increase Revenue
    • Protect Revenue
    • Reduce Cost
    • Avoid Cost
  • Cost of Delay is an alternative way to assess the economic impact of the inventory of design in progress.
  • CD3 is a prioritisation algorithm for work to do with different urgency, value and duration.
  • Cost of delay can be obtained dividing value by duration.

This blog post is in some way an extract of the ideas developed by @JoshuaJames and Donald Reinertsen.

For further information see next sources of information:

http://costofdelay.com

http://playbookhq.co/blog/profit-based-new-product-development-decisions-part-3-estimate-cost-delay/

http://leanagilechange.com/leanagilewiki/index.php?title=Cost_of_Delay

http://toolsforagile.com/blog/archives/647

http://agileconsulting.blogspot.com.au/2011/03/using-cost-of-delay-functions-to.html

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