SAFe: how to calculate the cost of delay?

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.

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)

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

Total delay cost: 56k

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

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:

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 :