What is Cost of Delay and how can it impact your business?

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What is Cost of Delay (CoD)?

Cost of Delay or CoD is a prioritization framework that enables a business to measure the economic loss in delaying the launch of a product. Sometimes it might be better to just rush into a certain product and make it ready for launch as soon as possible, while other times it could be better to delay that product for a while and focus on something else instead.

By segregating urgency and cost, the CoD provides a clearer picture of how to allocate the resources available to you. If the team feels after analyzing the CoD that the resources can be better used elsewhere and the current project can be delayed a bit, they can do so.

For a Product Manager, CoD is an efficient framework that can help them make important decisions and also change the complete mindset of a company. It does so by weighing in the costs and deadlines and offers a clearer view of where the company’s priorities must lie.

Why should you use the Cost of Delay approach?

Here are some reasons why a Product Manager must use the Cost of Delay approach:

More accurate costs of each initiative

Even highly experienced managers may not have the ability to correctly estimate the cost of delay. They could overlook the negative impacts of a delay or might miscalculate the amount of time required to complete the project. 

Using this framework allows organizations to come to data-driven estimates for cost of delay. This allows a team to make informed decisions about which projects to prioritize.

Better allocation of resources

Spreading your resources over multiple areas can sometimes not be such a good idea. This using this approach while backlog prioritization gives a clear idea about where to allocate your limited development resources so as to receive the best outcomes.

Provide data points for any changes in priority

Product managers must ideally always follow the product roadmap laid out at the start of the development, but may sometimes also receive an urgent demand for a change in functionality from various stakeholders in the product. 

Using the CoD approach can help the manager to explain to the stakeholders whether their demands could be met in time and what potential losses due to delay might occur. 

How to calculate the Cost of Delay?

To put it in simpler terms, to calculate the Cost of Delay you need to estimate the user business value that a certain feature would bring and then multiply it by the time required to develop it.

If any Feature A requires 3 months to build and has a user business value of approximately $10000 per month, the CoD would be calculated by multiplying 3 with 10000 which equals $30000. Every extra month after this would cost an additional $10000.

Now suppose you need to compare the CoD of two features to prioritize in your product backlog.

Let’s say Feature A requires 3 months to build and has a user business value of $6000 per month and another Feature B requires 4 months to build and has a user business value of $10000 per month.

Which feature should you prioritize?

This is the place where a new parameter CD3 is introduced. CD3 is the cost of delay divided by the time required for development. To further simplify this number, divide it by 1000.

Thus, CD3 for Feature A comes out to be (6000/3)/1000 = 2, while CD3 for Feature B comes out as (10000/4)/1000 = 2.5. The higher the CD3, the more should be the priority of the feature. Hence, in this case, Feature B must be prioritized.

In this way, depending on the complexity of different scenarios, product managers may prioritize different tasks by comparing the CoD associated with them.

FAQs

Q: What are the three main parts of Cost of Delay?

A: User business value, time duration, and CD3 or Cost of delay divided by duration are the three main parts of Cost of Delay. These parameters form the basis of comparison between features to decide what should be prioritized.

Q: Why is it important to calculate Cost of Delay?

A: By calculating the Cost of Delay, a company can easily identify the impact of time on their sales or any other outcome and hence, can prioritize accordingly to deliver the biggest return on investment.

Q: What is the cause of delay?

A: There can be many reasons for a delay in the launch of a product such as design changes, poor productivity of team members, inadequate planning, resource shortages, and changing user demands. The important thing is to identify the effect these changes will have on your overall goals and outcomes of the product.

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