Cost of Delay: An Economic Approach to Decision Making

COST OF DELAY
AN ECONOMIC APPROACH TO DECISION MAKING
matthew.r.philip@accenture.com
roger.turnau@accenture.com

ROGER
Copyright © 2020 Accenture. All rights reserved.
2
• Agile coach with Accenture’s SolutionsIQ
practice since 2018
• Wrote my first complete software program
(a text-based adventure game) when I was
11
• Ever a glutton for punishment, I became a
professional coder in 1995.
• Snuck off when no one was looking to earn
an MFA in Creative Writing from Florida
State in 2008
TECHNOLOGUS HIPPOPHOBOAMITE
• VERY VICIOUS!
• IF SEEN IN THE WILD,
APPROACH WITH
CAUTION
TURNAU, AGILE COACH

TOPICS FOR TODAY
3
• The Problem at Prangen Corp
• Understanding Prioritization
• Understanding Value
• What is Cost of Delay?
• How to Get Started with Cost of Delay
• How to Sequence Work to Maximize Value (WSFJ and Friends)
• Class of Service and Explicit Policies (Time Permitting)

MEET PRANGEN CORP
5
• Large, publicly-traded
financial-services
company
• Having issues matching
demand to capacity to
best to achieve their
strategic goals

THEY HAVE A BACKLOG
6
15 Large Initiatives

DEMAND MANAGEMENT
7
SVP OF MARKETING SVP OF TECHNOLOGY
My five
initiatives
must be done
immediately!
Photo by Rodrigo dos Reis on Unsplash
My group’s five
initiatives are
critical! They
must be
completed by
the third
quarter!
Photo by Etty Fidele on Unsplash

THE PORTFOLIO TEAM
8
• Bowing to politics and pressure to
get things done, the Portfolio team
funds both sets of initiatives.
• Now PranGen has 10 initiatives to
get done by year end
Photo by Josh Calabrese on Unsplash

THE WORK PIPELINE
AT PRANGEN CAN
SUPPORT TWO LARGE
OR THREE MEDIUM
INITIATIVES.
9

AT YEAR’S END
10
• By the end of Q4, only 7% of the
planned work was completed
• Limited value was created or
captured.
• Nothing was delivered to
customers
• Much of the work was half-done
• No revenue was realized
• Competitors swooped in and
stole market share
• Most importantly, there was no
learning
Photo by Ian on Unsplash

WALL STREET TO THE
RESCUE!
11
With a falling stock price,
and pressure to deliver,
the company binges on
short-term thinking.
Photo by Alec Favale on Unsplash

SLAPPED BY THE INVISIBLE HAND
12
The Illusion of Predictability
Fixed Scope
No Flexibility to Changing
Conditions
Fixed Budget
Random Projected Delivery
Dates
Fixed Schedule
No System-Wide Coordination
Around Customer Needs
Local Optimizations
Project Death Marches Due to
Massive Waste in the System
Long Lead Times

13
THE ROOT CAUSE
Toexecuteeffectivelyontheirstrategy,PranGenmustmatchdemandtocapacity
Economics is not so much about money as it is about scarcity. Trying to
do everything is a recipe for unsustainably slow delivery. But how do we
choose what to do?

14
1. HOW DO WE DECIDE WHAT NOT TO DO?
2. HOW DO WE ENSURE THAT WHAT WE
ARE DOING IS THE RIGHT THING TO DO?
3. HOW DO WE MAXIMIZE THE VALUE WE
DELIVER GIVEN OUR LIMITED CAPACITY?
The Problem

15
WHAT WE TALK
ABOUT WHEN WE
TALK ABOUT “VALUE”

HOW MUCH DOES NOT
HAVING SOMETHING
COST?
16
The problem: practicing piano while
traveling.
Potential solutions:
• Call music schools to rent space
• Make friends with a piano-owner
• Ship a weighted keyboard to your
hotel. (Nord Piano weighs ~40 lbs.
Yamaha P-125 weighs ~23 lbs.)

EVERYTHING WE VALUE
INVOLVES TRADE-OFFS
17
• Folding Keyboard from AliExpress
• Full standard-size 88 keys, but
non-weighted
• Weighs 2.5 pounds
• Can fit in carry-on luggage
Who does this product not make
sense for? If you’re a professional
pianist preparing for a concert
during vacation, this will not be
enough.

18
1. VALUE IS NOT PRECISELY MEASURABLE
2. WHAT MIGHT BE VALUABLE FOR ME MAY
BE WORTHLESS TO YOU
3. VALUE IS UNKNOWABLE IN ADVANCE
Value is Nebulous

19
HOW DO WE SET OUR
PRIORITIES?

20
“Highest-Paid Person’s Opinion”
Pros: Easy. All the burden of thinking is
deferred to the hippo.
Cons: The hippo rarely has enough
information to make good decisions.
Also, as in nature, when hippos
compete, it gets messy. Value is not
maximized at the same rate as ego
gratification.
HIPPO PRIORITIZATION

21
• Must Have
• Could Have
• Should Have
• Won’t
Pros: Brings people together to have a
conversation about what’s important.
Cons: Everything quickly turns into
“must have.” If everything is a priority,
nothing is.
MOSCOW PRIORITIZATION

22
The organization allocates a proportion
of development capacity to different
departments or stakeholders.
Pros: It feels fair. Everyone feels taken
care of.
Cons: The is no larger strategic vision
that helps maximize value for the entire
organization. Local optimization at the
expense of overall value creation.
EQUITY

23
Before committing to work, we analyze:
• Benefit/cost ratio
• Payback analysis
• Net present value discounts
Pros: More objective.
Cons: A ton of wasteful analysis is done
before you get approval. Leads to log-
jam up front, and unsustainably slow
value delivery on the back-end. Not
BENEFIT/COST RATIO HIGH JUMP

24
In order to make better economic decisions, we need a
framework for decisions that:
• Gives us a solid economic basis for our decision making
• Enables a focus on value and urgency
• Doesn’t waste a lot of time on unnecessary analysis
WHAT WE NEED

Copyright ©2020 Accenture. All rights reserved.
IF YOU ONLY
QUANTIFY ONE
THING, QUANTIFY
THE COST OF DELAY.
2
6
— Don Reinertsen, The Principles of Product Development Flow, Principle E3

THE RATE AT WHICH THE
VALUE OF A PRODUCT,
INITIATIVE OR WORK
ITEM DECAYS WHEN ITS
DELIVERY IS DELAYED
27
Cost of Delay

HOW MUCH MONEY
ARE WE NOT MAKING
BY NOT RELEASING
THIS FEATURE?
28
Cost of Delay

“We need Cost of Delay to evaluate the
cost of queues, the value of excess
capacity, the benefit of smaller batch
sizes and the value of variability
reduction. Cost of Delay is the golden
key that unlocks many doors. It has an
astonishing power to totally transform the
mind-set of a development organization.”
29
— Don Reinertsen, The Principles of Product Development Flow

TRADITIONAL COST ACCOUNTING
30
Team of Seven
• $185K per year (Inclusive of salary
and benefits)
Total Yearly Cost of Team: ~$1.3M
Loading Factor
• Space, equipment, HR Support
• Normally labor cost x 2
Total Load Factor: ~$2.6M
Total Yearly Cost for Team: ~$3.9M Daily Cost: ~$15K

TRADITIONAL COST ACCOUNTING
31
When we look at it this way, there’s no
difference between any of these projects.
Project Duration Team Cost Per Day Total Team Cost
A 4 weeks $15K $300K
B 4 weeks $15K $300K
C 4 weeks $15K $300K

ADDING COST OF DELAY
32
Project Duration Total Team Cost Cost Delay Per Week
A 4 weeks $300K $10K
B 4 weeks $300K $2M
C 4 weeks $300K $500K
When you analyze Cost of Delay, suddenly it’s
obvious what work is most urgent. Prioritization
is aligned to outcomes rather than processes.

BLACK SWAN FARMING
TYPES OF VALUE Increasing sales to new or existing
customers. Delighting or disrupting to
increase market share and size.
INCREASE REVENUE
Improvements and incremental innovation
to sustain current market share and
revenue.
PROTECT REVENUE
Improvements to sustain current cost base.
Costs we are not currently incurring but
may in the future.
AVOID COSTS
Costs that we are currently incurring that we can
reduce. More efficient, improved margin or
contribution.
REDUCE COSTS

34
Cost of Delay Profile #1
ShortLifecycle,PeakAffectedbyDelay
When there is a significant first-mover advantage. The cost to late
delivery is significant.
$BenefitsReceived
Time
Short Lifecycle - Peak Affected by Delay
Planned Entry
Late Entry

35
LongLifecycle,PeakUnaffectedbyDelay
Often seen when there is a manual process being automated.
$BenefitsRealized
Time
Long Lifecycle - Peak Unaffected by Delay
Planned Entry
Late Entry
Delay
Cost

36
LongLifecycle,PeakAffectedbyDelay
$BenefitsRealized
Time
Long Lifecycle - Cost Affected by Delay
Planned Entry
Late Entry

37
GETTING STARTED
WITH COST OF
DELAY

38
How to Get Started With Cost of Delay
Pros:
• Simple
• Easy to Reason about
• Good way to swag
what’s worth doing
further analysis on
Cons:
• Imprecise
• Still might be liable
to HIPPO warfare

39
Step Two: Business Value Proxies
AKA,WHATSAFEDOES
User Business
Value
Time
Criticality
Risk-Reduction
and/or
Opportunity
Enablement
Cost of Delay
Where every factor is on a modified Fibonacci
scale of 1, 2, 3, 5, 8, 13, or 20.
In a list, every column must have at least one
value that is 1.

40
Step Two: Business Value Proxies
AKA,WHATSAFEDOES
• Simple
• Easy to work with/reason
about
• Trying to pin down precise
outputs on imprecise inputs
is often a waste of time
• Having all three components
at the same level can lead to
contradictions.
• If you are just giving rough
proxy values, there’s still
ample room for a HIPPO
fight. (You need to go
beyond play money).
PROS CONS

41Step Three: Express CoD in Real Dollars
BECAUSEACTUALMONEYISAREALMOTIVATOR

42Step Three: Express CoD in Real Dollars
BECAUSEACTUALMONEYISAREALMOTIVATOR
• Both simple and expressive
• Nothing captures urgency
quite as compellingly as the
almighty dollar
• Puts real teeth into alignment
• Even HIPPOs have to pay
attention
• Still depends on trust (the
extravagant liar problem)
• No guarantee of accuracy
PROS CONS

45
SEQUENCING
WORK

01
02
03
04
46
SJF (Shortest Job First)
HDCF (High Delay Cost First)
WSJF (Weighted Shortest Job First)
FIFO (First In, First Out)
SCHEDULING
PRINCIPLES

SJF (SHORTEST JOB FIRST) SCHEDULING
47
When delay costs are homogeneous,
do the shortest job first.
Project Duration Cost of Delay
A 1 month $3m/mo
B 3 months $3m/mo
C 10 months $3m/mo
CostofDelay
Duration
Shortest Job first
CostofDelay Duration
Longest Job first
B
C
A
Delay
Cost
B
C
C
C B
ADelay
Cost

HDCF (HIGH DELAY COST FIRST) SCHEDULING
48
When job durations are
homogeneous, do the high
cost-of-delay job first.
CostofDelay
Duration
Highest COD first
A 3 months $10m/mo
B 3 months $3m/mo
C 3 months $1m/mo
A
B B
BDelay Cost
C
Lowest COD first
A
B
B
B
Delay Cost
C

WSJF (WEIGHTED SHORTEST JOB FIRST) SCHEDULING
49
Project Duration Cost of Delay COD/Duration
A 1 month $10m/mo 10
B 3 months $3m/mo 1
C 10 months $1m/mo 0.1
When job durations and delay
costs are not homogeneous,
use WSJF.
CostofDelay
Duration
Highest WSJ first
B
C
Lowest WSJ first
B
B
BDelay Cost
C
Delay Cost
A
B A

WSJF (WEIGHTED SHORTEST JOB FIRST) SCHEDULING
50
A 4 months $10m/mo 2.5
B 3 months $6m/mo 2.0
C 10 months $14m/mo 1.4
costs are not homogeneous,
use WSJF.
What is the best sequence?

DEPENDENCIES/BIG-BANG DEPLOYMENT OBVIATE WSJF
51
A 1 10 10
B 3 3 1
C 10 1 0.1
If you dependencies require you
to batch release, cost of delay is
a moot point.
CostofDelay
Duration
Highest WSJ first
B
C
Lowest WSJ first
B
CA
B
A
Delay CostDelay Cost

WHAT IF YOU DON’T KNOW EITHER?
52

FIFO (FIRST IN, FIRST OUT) SCHEDULING
54
A ? ?
B ? ?
C ? ?
costs are unknown, use FIFO.
CostofDelay
Duration
First in, First Out
C
B
A
Delay
Cost

55
Decision Table
homogeneous or Unknown Heterogeneous
homogeneous or Unknown First in, First out Highest Cost of Delay First
Heterogeneous Shortest Job First
Weighted Shortest Job
First
Duration
Cost of Delay
Use this table when
choosing a sequencing
strategy for a given set
of options, depending
on whether their cost of
delay and duration are
known or similar.

56
CLASSES OF
SERVICE AND
EXPLICIT POLICIES

POLICY FOR SELECTION AND
PROCESSING BASED ON
DIFFERENT CUSTOMER
EXPECTATIONS, RELATIVE
VALUE, RISK, OR COST OF
DELAY
57
Class of Service

CLASSES OF SERVICE: EXAMPLES
60

CLASSES OF SERVICE AND POLICIES
61
When we have anything in
expedite, pull that first.
If a fixed-date item is due
within 30 days, pull it.
Pull standard-urgency items
until we reach our WIP limit.
Always be working on one
intangible item, if we have any.
Expedite:
Finished within
2 days 85% of
the time
Fixed-Date:
95% due-date
performance
Standard:
70th percentile:
15 days
Intangible:
10-20%
allocation

63
1. PROJECTS = BIG BANG = WORST-CASE
ECONOMICS
2. SMALL QUEUES MAXIMIZE VALUE
3. VALUE IS RARE, EXTREME, AND OBVIOUS IN
RETROSPECT
4. CHOOSE RIGHT COD STRATEGY BASED ON
WHAT YOU KNOW (AND DON’T)
Takeaways

64
1. DON REINERTSEN, THE PRINCIPLES OF PRODUCT DEVELOPMENT FLOW
2. HTTP://LPD2.COM/SAMPLE-PAGE/THE-PRINCIPLES-OF-FLOW/
3. DON’T BE A DITKA (DAN VACANTI)
4. URGENCY PROFILES
5. KANBAN, CHAPTER 11, P.123
6. ESSENTIAL KANBAN CONDENSED, MANAGE FLOW, P.21
7. HTTP://BLACKSWANFARMING.COM/COST-OF-DELAY-DIVIDED-BYDURATION/
8. HTTPS://BLACKSWANFARMING.COM/EXPERIENCE-REPORT-MAERSK-LINE/
9. HTTPS://BLACKSWANFARMING.COM/WP-CONTENT/UPLOADS/2014/03/BLACKSWANFARMING-
CANVAS.PDF
10.HTTPS://MAUVISOFT.COM/TERMINOLOGY/#CURVE
11.UNDERSTANDING COST OF DELAY AND ITS USE IN KANBAN (ANDY CARMICHAEL)
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