How to calculate the Cost of Delay
Channel: Playbook
Date: 2018-09-18

This video shows the steps to calculate the Cost of Delay and develop your own model. We have a template available on our website here: https://www.playbookhq.co/cost-of-delay-free-template?

First of all, it's critical to know the cost of delaying your product launch. I promise you it will change everyone’s perspective. And it’s not that hard.

There are dozens of possible topics for lean or agile so I had to figure out the best place to start. So I decided to focus on what’s most important in terms of business impact, and that happens to be Lost Profit from delays in New Product development, otherwise known as the Cost of Delay.

Team members don’t often think of it, but one of the most important goals in terms of a new product is the overall profit that the product makes in the long run. 

After all, financial performance was probably the biggest factor in getting the project approved in the first place, so it’s going to be something that’s closely tracked by management in the end.

And there’s a really good reason for this.
 
Why Cost of Delay is so important

Most people are generally aware that their company wants to develop products faster. If you get to market first, you’ll usually sell more products and at a higher margin than someone who gets there later. And if you can iterate faster, after a few product releases, you’ll have the dominant product in the market. 

That makes sense intuitively, but most people I talk to don’t know the actual value of going fast, or the inverse, how much it costs to be late. It’s true, you can tell teams to hurry because time is important, but something changes when they know the actual dollar value of being late.

And there are other benefits to knowing your Cost of Delay.

For example, when two projects are competing for the same resource and one has to be delayed, everyone can agree which product has to wait, and it’s not decided by which program manager has the most influence. 

It also allows teams to know when it’s smart to pay extra to expedite things that are truly impacting the schedule.

If you’re on the fence, do the survey first where you ask them to guess what they think the Cost of delay is. If you see a lot of variation, then you’ll know this is important. 

It doesn’t have to be perfect. Any number you come up with is going to be better than guessing. 

The goal is to get everyone more closely aligned and have buy-in to the relative size of the number, not to have a perfect number. 

You get the buy-in by having everyone participate and provide feedback on the model. And it’s better to have a simple model that everyone understands than it is to have a complex model that’s only slightly more accurate but people don’t understand it.

Closing
If you have any questions send me an email at dpaulson@accuer.com and I’ll be happy to answer them. Or, if you want the template, we’d be happy to share it so we’ll make it a download you can get from our website.

If you like this video, subscribe to our channel so you’ll be notified when we release more lean-agile training videos.


Some additional resources we have available are:

COD Template: https://www.playbookhq.co/cost-of-delay-free-template
COD Books: http://reinertsenassociates.com/books/
This COD Blog: https://www.playbookhq.co/blog/calculating-cost-of-delay
Detailed COD Blog: https://www.playbookhq.co/blog/profit-based-new-product-development-decisions-part-3-estimate-cost-delay
Cause of Late Projects: https://www.youtube.com/watch?v=buOHPsLba7g