The Economic Perspective. Maximising Value Creation with Cost of Delay

What is Waste?

If we want to define value, we must also define waste. So, what is waste? Can we provide a common, shared answer within our organization? For example, delaying the launch of a new product, choosing Scrum over Kanban, or increasing costs. Are these considered waste? How do we decide?

Let’s take the case of testing. Does testing create value or is it a necessary waste? Lean experts categorize testing as waste, a NVAA necessary non-value-added activity. However, adopting an economic perspective leads us to a different conclusion.

Let’s take a new drug candidate, tested through a Phase I trial with a 50% success rate. If you are a rational investor, would you invest more to acquire the candidate molecule, after the first testing phase? The answer is yes. But why is that? The number of patients the drug can help remains unchanged, and both the final product price and its manufacturing costs will stay the same. What has changed is that the probability of realizing a billion-euro profit is now much higher. Testing created economic value by reducing risk.

So, what is value, then?

We know from Microeconomics that value is the maximum price a customer is willing to pay for a product or service. How do we then translate this to the more inside-out organizational perspective that we use in everyday work?

From an organizational standpoint, value represents the lifelong profit impact of a product or service. Once we define value from an economic perspective, we can also define waste in the same way, as the failure to maximize value.

Trade-Offs

Why is that important? In product development, we often face trade-offs expressed in different, non-comparable units of measure. For instance, we might need six months of development to improve the mean time between failures (MTBF) by 10%. Whenever you encounter a trade-off involving two forms of waste—such as delayed time to market and system halts due to failure, whose impacts move in opposite directions—you need a unified measure of value to compare, evaluate, and prioritize. Without this, the mantra of waste elimination becomes useless.

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Fig.1 Adapted from The Principles of Product Development Flow, by Don. Reinersten

Cost of Delay

The economic perspective on value and waste provides this crucial, unified view through the product lifecycle profit impact, as described in The Principles of Product Development Flow, by Don Reinersten. The CoD Cost of Delay refers to the change in value produced by a specific action. It’s worth noting that quality, environmental, and social impacts are included, and embedded in the five main categories.

The model reveals the trade-offs in the product development process, enabling value-based decisions.

When I introduce the concept of CoD, I am often told that a business case is already made for each initiative. However, these business cases are typically used only as toll gates at the portfolio management level, to authorize the start of an initiative. What we want instead is a decision-making criterion that supports us both at the portfolio management level and in the daily trade-offs.

To achieve this decision-making criterion, we certainly start with the business case when it exists (and if it does not exist, we create it). Based on this baseline, we set up sensitivity analyses that will become the basis for our decision-making criteria. These criteria will also be regularly updated based on the progress of initiatives, changes in the market, and our better understanding of the environment and the development process. The process can be as low-tech as we want; what is important is the involvement and commitment of the relevant business and tech areas.