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SAFe: how to calculate the cost of delay?

Hady Zaky
SAFe: how to calculate the cost of delay?

One aspect of organizational agility is being able to deliver products or services that provide the most value to the customer, while costing the least. Achieving this balance improves profits and strengthens sustainability... provided you stay on schedule.

Organizations have a variety of ways to deliver this value, and it's a matter of prioritizing those that provide the most value, with the least investment, while taking into account the competitive landscape. It is in this organizational context that the cost of delay becomes useful as an objective element of prioritization, whereas too often prioritization is done on subjective elements.

Hady Zaky, SAFe expert and trainer, details how delays can negatively impact the budget, while many organizations still don't know how to evaluate them financially. Because the cost of delay should not be guessed at, let's see how to calculate it to take it into account when prioritizing projects.

What is the Cost of Delay (CoD)

It is the total additional expenses caused by a delay in the delivery or launch of a project. If you are able to calculate this cost of delay, then you can use it as an objective tool to prioritize projects or their iterations in order to organize your backlog.

Here are some examples where the CoD can help prioritize:

  • Product development: evaluate the expenses in case of a delay in the launch;
  • Feature development: evaluate the loss of revenue if a new feature is delayed;
  • I.T. Operations: assess the loss of revenue due to delay in implementing more efficient processes.

Making the connection between delay and lost revenue allows you to determine the degree of urgency and communicate it to stakeholders... to maximize the chances of finishing on time.

What the Cost of Delay (CoD) is for

The ultimate goal of business initiatives is to change the organization, better position it against the competition and generate more operational revenue (or lower operational costs). Delaying an initiative is undoubtedly a drawback. Organizations tend to undertake more initiatives than their capacity allows, hence the need to prioritize them, whether they are called projects, epics, features, etc., depending on the standards, methods or frameworks used by the organization.

The examples given here are meant to simplify things in order to identify the best OJECTIVE prioritization method.

Can we really calculate the cost of delay?

This is an exercise that can be carried out in three steps.

  1. List the projects
  2. Evaluate the options
  3. Calculate the cost of delay

1-List the projects

  • First you need to have an exhaustive list of projects (or iterations) to be delivered and their respective delivery times.
  • Then, you can establish or estimate the estimated weekly profits or savings induced by the delivery of the projects.
  • Finally, you need to calculate the cost of a delay.

Let's say your new project's return on investment is estimated at $20,000/week. A 2-week delay is therefore equivalent to a $40K loss of revenue. We are assuming here that the revenue from a project is generated right after the project is completed, and that the revenue is steady. This is an acceptable approximation, and it is an approximation that we take for the illustration of the principle.

Let's take an example with three projects, considering that a team can only take on one project at a time: your project A (below in the table) must last 2 weeks for revenues of $3K. 3K/2 = $1,500/week, after the project is completed. Each week of delay will cost $1,500. With this formula you can anticipate at what point the project will no longer be viable.
If you repeat the exercise for all ongoing projects, you get a hierarchy according to the importance of weekly losses.

Project

Duration (in weeks)

Revenues (CAN$)

CD3

A

2

3 000

3 000/2 = 1 500

B

4

1 000

250

C

10

6 000

600

Total

18

10 000

 

Let's now look at what different prioritizations of these three projects would look like, assuming that the team only delivers the projects in succession, and this by only looking at the raw numbers of expected benefits in a time period of 16 weeks, i.e. the time to deliver the 3 projects in succession

Delay of project A and B, if project C is prioritized (in K$): The calculation is done over the duration of project C (10 weeks)

Project

S1

S2

S3

S4

S5

S6

S7

S8

S9

S10

S11

S12

S13

S14

S15

S16

 

A

0

0

0

0

3

3

3

3

3

3

3

3

3

3

3

3

36

B

0

0

0

0

1

1

1

1

1

1

1

1

1

1

1

1

12

Total delay cost: 48k

Delay of project A and C, if we prioritize project B (in K$): over 4 weeks. As C is not delivered before 10 weeks, no CoD

Project

S1

S2

S3

S4

S5

S6

S7

S8

S9

S10

S11

S12

S13

S14

S15

S16

 

A

0

0

0

0

0

0

0

0

0

0

3

3

3

3

3

3

18

C

0

0

0

0

0

0

0

0

0

0

6

6

6

6

6

6

36

Total delay cost: 56k

Delay of project B and C, if we prioritize project A (in K$): over 2 weeks.

Project

S1

S2

S3

S4

S5

S6

S7

S8

S9

S10

S11

S12

S13

S14

S15

S16

 

B

0

0

0

0

1

1

1

1

1

1

1

1

1

1

1

1

10

C

0

0

0

0

0

0

0

0

0

0

6

6

6

6

6

6

36

Total delay cost: 46k

There is no doubt that prioritizing project A is objectively the most advantageous, followed by C and B.

However, doing this exercise is costly when you handle more projects

Let's go back to the first table:

Project

Duration (in weeks)

Revenues (CAN$)

CD3

A

2

3 000

1500

B

4

1 000

250

C

10

6 000

600

Total

18

10 000

 

Looking at the last column, the same objective prioritization is to be observed: A, followed by C, followed by B

So, when prioritizing, regardless of the number of items in your backlog, prioritizing the highest delay cost value is the objective method

Delay cost = Weekly expected benefits of the feature / number of weeks of completion time

Important note: in addition to the "operational" costs, you need to consider two key elements: the added value for the customer and the degree of urgency. If either of these elements is zero... then the cost of delay is also zero.

2-Evaluate prioritization methods

There are four approaches to prioritizing projects:

  1. No prioritization: projects will be handled simultaneously since there is no prioritization
  2. Duration: projects are prioritized according to their completion time, from shortest to longest.
  3. Value: prioritization is done according to expected revenue, from highest to lowest.
  4. CD3: prioritization is based on the calculation of potential weekly losses, from highest to lowest.

3-Calculate the cost of delay according to the prioritization methods

  • Method without prioritization: you develop your projects simultaneously. If we take the above table as an example, you take 16 weeks to complete everything and obtain revenues of $10,000. To which you have to deduct the cost of the delay, i.e. the same $10,000 multiplied by 16 weeks, i.e.... $160,000
  • Shortest duration prioritization method: projects are prioritized one after the other and revenues are generated only after the project is completed. Let's go back to the table above to do the calculation:

    Project

    Duration (in weeks)

    Weekly profits (CAD)

    Costs (CAN$)

    A

    2

    3 000

    6 000

    B

    4

    1 000

    6 000
    (1 000 x 6 sem.)

    C

    10

    6 000

    120 000
    (6 000 x 20 sem.)

    Total

     

     

    132 000

    Projects are listed in descending priority in the table.
    Here the CoD is $132,000
  • Method prioritizing the projects with the highest weekly value: the order of the projects depends on their value, starting with the one with the highest value. Let's continue with our example:

    Project

    Duration (in weeks)

    Weekly profits (CAD

    Costs (CAN$)

    C

    10

    6 000

    60 000

    A

    2

    3 000

    36 000

    (3 000 x 12 sem.)

    B

    4

    1 500

    16 000

    (1 000 x 16 sem.

    Total

     

     

    112 000

    Here the cost of the delay is $112,000
  • Prioritization according to CD3: here the order is according to the delay cost.

    Project

    Duration (in weeks)

    Weekly profits

    CD3

    A

    2

    3 000

    1500

    C

    10

    6 000

    400

    B

    4

    1 000

    250

    Once you have done your calculations, you can assess the least expensive approach through CD3.

Why prioritize by cost of delay?

Data for informed decisions: provided that it is based on data (and not on a wet-finger estimate that is usually too low), it is an objective indicator of the costs incurred by a delay.

Data to guide re-pricing: if a feature is added unexpectedly (e.g., due to user feedback or a competing offer), it will be possible to assess its budgetary relevance.

Data to allocate resources: knowing the priority of projects makes it easier to define teams and, by extension, to avoid dispersion and associated costs.

To go further :

Safe: Leading SAFe® Certification



 

 

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