How to calculate Cost of Delay

The challenge

When creating a new product, one usually have a lot of ideas about what functionalities product could have. Unfortunately, it is impossible to implement everything for two simple reasons. Firstly, work on new functionalities cost a lot, and secondly, takes a lot of time. At Pragmatic Coders, our goal is to help customers go-live with their product as soon as possible.

The solution

Cost of Delay helps to analyze and prioritize requirements. We could assess the impact of introducing, resigning or postponing product features, on the client’s business.
The key aspect of this methodology is to maximize the increase in product value over time by minimizing the cost of delay caused by work on individual functionalities.
An additional benefit of using this method is overcome of the cognitive bias – the tendency to prefer avoiding losses over gaining profits, described by Amos Tversky and Daniel Kahneman in The Prospect theory.

Calculating Cost of Delay

To illustrate how to work in accordance with this methodology, we consider several different approaches to prioritizing tasks. Let’s assume that we have to implement four functionalities, which are described in the table below:

FeatureDevelopment timeEstimated weekly profit*
F12 weeks$ 3 000
F21 week$ 4 000
F35 weeks$ 17 000
F44 weeks$ 12 000
Total12 weeks$ 36 000

*Estimated weekly profit – this is a parameter describing the increase in business value after the introduction of functionality. It may be a longer interaction with the product, which causes the user to display more ads, optimization of the user registration process, which gives a drop in the percentage of abandoned registrations, etc. It is crucial that the given functionality is assessed in terms of revenue growth.

Our goal is to minimize the Cost of Delay, i.e. the total cost of lost benefits when entering functionalities into production. Let’s try to estimate what options we have when it comes to task prioritization and calculate what the Cost of Delay will be. Let’s consider 4 situations:

  1. No prioritization – common scenario, everything is important, so we do everything at once
  2. Speed priority – the fastest tasks at the beginning
  3. Value priority – tasks that bring the greatest business value to the beginning
  4. Value increment priority – tasks that bring the highest value increase at the beginning

Let’s count the Cost of Delay for each prioritization technique.

No prioritization

We do everything at once, i.e. in 12 weeks we will provide all functionalities.
Cost of Delay = (12 weeks * $ 36 000)/week = $ 432000

Speed priority

Implementation order: F2, F1, F4, F3
Waiting time:

  • F2: 1 week
  • F1: 3 weeks (1 week due to F2 implementation and 2 weeks to complete F1)
  • F4: 7 weeks
  • F3: 12 weeks

Cost of Delay = (1 week * $ 4000 + 3 weeks * $ 3000 + 7 weeks * $ 12 000 + 12 weeks * $ 17 000)/week = $ 301000

Value priority

Implementation order: F3, F4, F2, F1
Waiting time:

  • F3: 5 weeks
  • F4: 9 weeks
  • F2: 10 weeks
  • F1: 12 weeks

Cost of Delay = (5 weeks * $ 17 000 + 9 weeks * $ 12 000 + 10 weeks * $ 4000 + 12 weeks * $ 3000)/week = $ 269000

Value increment priority

Before we could determine implementation order, lets determine the increase in business value per unit of time. We could do that by dividing estimated weekly profit with development time.

FeatureDevelopment timeEstimated weekly profit*Increase in business value per unit of time
F12 weeks$ 3 0001500 $/week
F21 week$ 4 0004000 $/week
F35 weeks$ 17 0003400 $/week
F44 weeks$ 12 0003000 $/week
Total12 weeks$ 36 000

Implementation order: F2, F3, F4, F1
Waiting time:

  • F2: 1 week
  • F3: 6 weeks
  • F4: 10 weeks
  • F1: 12 weeks

Cost of Delay = (1 week * $ 4000 + 6 weeks * $ 17 000 + 10 weeks * $ 12 000 + 12 weeks * $ 3000)/week = $ 262000

Comparison of prioritization methods

Prioritization methodCost of Delay
No prioritization$ 432 000
Speed priority$ 301 000
Value priority$ 269 000
Value increment priority$ 262 000

We could clearly see that “Value increment priority” method minimize the cost of delay. Additionally one could see how destructive the complete lack of prioritization is.

Summary

At Pragmatic Coders we want our customers to succeed. One of the fundamental indicators that counts with any investment is return on investment (ROI). We can maximize ROI for our customers in two ways: helping them to increase revenue or reduce costs. Cost of Delay optimization ideally fits into the latter element, however, in a way that does not affect the quality of the delivered product.

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