Monday, April 25, 2016

Delay Cost and Urgency Profiles

Understanding Cost of Delay (Part 2): Delay Cost and Urgency Profiles

In part one of this series of blogs on Understanding Cost of Delay and its Use in Kanban we explored how - from understanding the business benefit that is likely to occur following the decision to implement a proposal now or later - we can derive 
Value Flow, Cumulative Value, Delay Cost
 and Urgency for time-sensitive feature
(click on image for more detail)
  1. the value flow (net benefits, positive and negative) each week through the useful life of the proposal, for a given release date
  2. the change in cumulative value (Net Present Value, NPV, or life-time profits) as a  function of time, for a given release date
  3. the Delay Cost Profile - how much business value is lost as a function of the delay 
  4. the Urgency Profile (the rate at which value is lost as a function of the delay)
Note: The terms Cost of Delay (CoD), Class of ServiceDelay Cost, Lead Time, NPVwork item and Urgency, as well as over 60 commonly used terms in Kanban and Lean are defined in the Kanban Glossary in Essential Kanban Condensed [2] (currently available as a free download).

For the type of work item that was considered in part 1 (a product feature in a time-limited competitive market), the four curves are shown above: value flow, cumulative value, delay cost (as a function of the delay), and urgency (as a function of the delay).

This feature shows a diminishing rate of cost of delay (urgency), due to the twin effects of a reduced peak in earnings and reduced period of earning, the longer the feature is delayed.

What if we were examining a different type of work item which was estimated to save a certain amount of work each week, work which is currently being contracted out to external staff? In other words the same savings would occur every week for the foreseeable life of the product. Here is an estimated projection for the 4 curves in this case ...
Value Flow, Cumulative Value, Delay Cost and Urgency
for a feature providing constant benefit for a period of time
In this case the cumulative NPV is more or less a straight line (bending downwards slightly due to the present value discount), and it results in a CoD profile which is also more or less a straight line with the same gradient (bending upwards slightly). Straight line CoD profiles result in constant urgency which we can see (approximately) in the final graph in the series.

Different again - what about an item that would save a penalty fine from a regulator if a certain issue is not addressed by a fixed date? Here are the curves ...
Cash Flow, Cumulative NPV, Cost of Delay and Urgency
for a feature providing step-function in benefit at a fixed date

This work item displays a sudden step-function in cumulative NPV at the point the fine would be applied, and a similar step-function in the CoD about 10 weeks before the date of the fine, since development Lead Time is estimated to be 10 weeks. The urgency profile is a spike - no urgency up to the "last responsible moment" when work must start, and no urgency after this point since you would then have passed the "first irresponsible moment"; there is no avoiding the fine after that point! In reality the CoD and Urgency profiles should be smoother since there is uncertainty in the estimate, and leaving it to the last moment increases the risk of incurring higher costs in order to hit the date, or indeed of missing the date due to unforeseen circumstances.

Value Flow, Cumulative Value, Delay Cost
and Urgency for a feature providing constant
benefit
 for a period beginning at a fixed date
Finally consider the case where the savings of staff (similar to the second scenario above) would not start until a fixed date. See graphs to the right.

We can see this case effectively combines the previous two, with a period of low or negative Delay Cost, followed by approximately linear Delay Cost up to the end of the opportunity.

We have taken some time here to look at the 4 curves (Value Flow, Cumulative Value, Cost of Delay and Urgency) for these 4 different types of feature because it is easy to confuse between them. In the case of the "constant benefit" item, the Cumulative Value and Delay Cost look almost identical, with the same units on both axes. This has caused some confusion and some inaccurate statements about the use of cost of delay. Take care!

One of the observations to make about the graphs shown so far is that to estimate and derive them accurately for real features is difficult and error-prone. While this is true, one should not conclude from it that we should therefore estimate a completely different entity, which is easier but not well correlated with the scheduling decisions we wish to make! (Sadly, you may also come across some advice like that.)

However it does suggest that looking at archetype profiles for different types of work item may be helpful. Picking from a menu of profiles, based on the type of feature proposed e.g. diffentiator in a competitive market, cost-saver in a monopoly market, fixed date cost-saver, and so on, is much simpler than trying to derive these curves from scratch. Some tools for Kanban are already offering such features. The profile can be combined with order of magnitude estimates of value and urgency (e.g. using a series such as 1, 2, 5,10, 20, 50, 100, 200, 500, 1000, etc.).

Kanban [3] defines 4 archetypes with different Delay Cost Profiles which are typically used to differentiate Classes of Service. Black Swan Farming [4] also suggests some typical profiles. The Kanban archetypes do not correspond exactly to the types of feature discussed above, though there is some overlap.
Kanban's Delay Cost Archetypes, from Essential Kanban Condensed

The archetypes show 4 Delay Cost Profiles:
  1. Expedite items have very high urgency (high CoD) and there is no end in sight to the cost - if you wait, the losses don't come to an end. It's a straightforward decision - do it now! 
  2. The Fixed Date items also have high impact but only if you miss the deadline. The scheduling imperative here is to make sure you start before the last responsible moment and deliver before the deadline. 
  3. The Standard profile is approximately linear to start with and tails off or cuts off as the opportunity loses value. Standard items should therefore be done as soon as possible and scheduled relative to each other according to the degree of urgency and the item's size (see later discussion of WSJF). 
  4. Finally, Intangible items have an apparently low urgency. One might ask why do them? Two reasons. The intangible profile does indicate a rise in urgency - possibly a steep rise - will happen in the future. It is useful to make some progress on these items even though the impact in the short term is likely to be low. In addition having some items in the schedule which are "interruptible" makes the system more resilient in the event of expedite items having to be handled, or events which threaten the service level agreement for standard items.
So how might a workshop gather the quantified information that we need for scheduling the work item options based on cost of delay, particularly if we do not currently have a menu of items to pick from. Here's a generalised profile of cost of delay and urgency that (roughly) covers all the profiles we have discussed within the precision we could reasonably expect from the workshop.

Using this profile we can ask for 3 parameters that give enough detail for us to schedule the items. There are 2 dates (t1 and t2) and the slope of the CoD line (or urgency). Before t1 there is low or zero CoD - it's the "CoD low until date" (CLUD). After t2 there is also low or zero CoD - it's the "CoD low after date" (CLAD).

Armed with this information about delay cost and urgency profiles, we can now move forward to consider the WSJF method itself. To use it we need information about the urgency, the urgency profile and the duration taken by implementation of the work item.

This is considered in the next blog in this series.

Read part 3 now: How to calculate WSJF

Back to part 1: Understanding Cost of Delay and its Use in Kanban
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