Cost of Delay
What is Cost of Delay?
Cost of Delay is a prioritization framework used by product managers and development teams to assess the costs associated with delays in the delivery of features or products. The Cost of Delay approach helps product managers to weigh their options with a better understanding of the potential impact of delay.
According to Don Reinertsen, one of the leading voices in Lean development and author of The Principles of Product Development Flow, “Cost of Delay is the golden key that unlocks many doors”. If you only quantify one thing about your development process, he says this should be it.
By taking into account the Cost of Delay for a particular product or feature, product teams will have a better understanding of the financial impact of time on what they might work on next, and how this impacts the product’s roadmap and backlog.
We discuss the Cost of Delay and all of the other important prioritization frameworks you’ll need to know as a product manager, in our helpful eBook The Product Manager’s Guide to Prioritization Models.
How do you use Cost of Delay?
The main principle of Cost of Delay is that realizable profit depends on availability. In other words, the longer a product takes to be developed or a feature to be added, the longer the product launch is delayed and the longer it takes for revenue to be generated.
You can’t make money from features or products that aren’t in the hands of your customers, but some things might be worth the extra investment of time for the returns they will bring.
For example, let’s say a product team is debating between two features to develop. By analyzing the Cost of Delay for each, they can determine which feature will generate the most revenue per unit of time within a given period.
In product development, the Cost of Delay prioritization framework can be used to present internal improvements in monetary terms so teams can understand why certain tasks matter to the business. By understanding the potential monetary impact of deferred work, product teams can better prioritize tasks and ensure that limited resources are allocated to projects with the highest potential impact.
Overview of the Cost of Delay framework
The Cost of Delay framework helps organizations to quantify the financial impact of deferring projects or improvements by transforming “change in time” into “change in money.”
It consists of three main components:
- User Business Value – The economic value that a product or feature brings to the end-user or customer.
- Time Criticality – The urgency and importance of completing a project or feature within a specific timeframe.
- Risk Reduction/Opportunity Enablement Value – The potential risks that a project or feature can mitigate or the opportunities that it can enable.
To determine the overall Cost of Delay, these three components are added together. This value is then used to prioritize projects using the Weighted Shortest Job First (WSJF) model, which aims to maximize the economic value delivery per unit of time.
Cost of Delay divided by Duration (CD3)
CD3, or Cost of Delay divided by Duration, is a key metric in the Cost of Delay framework. It helps you understand the value of accelerating the delivery of a particular feature or project, as well as the potential cost of delaying it.
Once you have calculated the CoD, you then need to estimate the duration of the delay. This could be the time it takes to complete the feature or project, or the time it takes to deliver a particular version or iteration of the feature or project. You divide the CoD by the duration of the delay to get the CD3 value.
You calculate CD3 simply by dividing the CoD you’ve already determined for an idea or feature by the period of time it will take to develop and release it. The higher the CD3 value, the more urgent and important the idea or feature is to the success of your product.
Understanding the Components of Cost of Delay
By breaking down the Cost of Delay into its components, teams can better understand the impact of time on their product roadmap and make better-informed tradeoff decisions to maximize the financial impact of their work.
User Business Value
User Business Value is the value that a feature or functionality will bring to the end-user and the business. Additionally, when evaluating the value of product initiatives, organizations need to consider Return on Investment (ROI).
When evaluating marketing work, it is important to consider the effect on user satisfaction and revenue. For example, if a marketing initiative will increase customer satisfaction and revenue, it may have a higher User Business Value and ROI. Ensuring you have a solid understanding of your user base and their preferences will help you to develop features that will drive user satisfaction and increase revenue.
Time Criticality
Time criticality refers to how time-sensitive a project is and how quickly it needs to be completed to avoid negative consequences. Projects that are more time-critical have a higher cost of delay since the impact of a delay will be greater.
For projects that are highly time-critical, a delay of even a few weeks could have a noticeable effect on the project’s profitability. That’s why it’s crucial to prioritize time-sensitive projects accurately to avoid unnecessary delays that may lead to a higher cost of delay.
Opportunity Cost
When evaluating the cost of delay, it’s important to consider the opportunity cost that a delay may bring. For instance, if a product launch is delayed, the company may miss out on potential revenue and market share that could have been generated during the time the launch was pushed back.
If this lost revenue and market share are substantial enough, the opportunity cost of delaying the project may outweigh the cost of putting additional resources towards the project to speed up the timeline.
The Cost of Customer Dissatisfaction
When it comes to product development, customer satisfaction is key. Customer dissatisfaction can have a significant impact on the success of a product or project, leading to lost revenue and negative word of mouth. It’s important to consider how delays could affect the satisfaction of users and customers, and how much it would cost to correct any potential issues caused by those delays.
Negative word of mouth can spread especially quickly and easily these days. A dissatisfied customer may share their experience with their friends and followers, potentially influencing the buying decisions of others. This could have a ripple effect on the success of the product or project, leading to further lost revenue and a damaged reputation.
Therefore, it’s crucial to factor in the potential costs associated with customer dissatisfaction when analyzing the Cost of Delay. This could include the costs of correcting any issues caused by the delay, as well as the potential costs of lost revenue and a damaged reputation.
In order to avoid customer dissatisfaction and its associated costs, it’s worth considering prioritizing tasks based on their impact on customer satisfaction. This will help to ensure that you focus on delivering a satisfying experience for your customers, which should ultimately lead to more success for your product.
