Don't prioritise projects by ROI, use cost of delay


19 Jul
19Jul

Prioritising projects and initiatives by ROI (return on investment) seems a sound way to determine the best business opportunities to pursue.

But actually it isn't – or at least it's not the whole story. Positive ROI is certainly a pre-requisite for an initiative to be a viable option for economically sound prioritisation, but it is NOT the optimum way to prioritise it against other opportunities competing for scarce team capacity.

𝗪𝗛𝗬?

Consider the following two hypothetical projects, A and B. For simplicity's sake, let's assume we have perfect knowledge* of the time/cost required to deliver (both 3 months, same cost) and the profit we will make over the year once they are completed ($1 million and $10 million respectively). Given the specialist skills and focus required, you can only pursue one of these projects right now.

Which one would you choose?

Seems obvious, right? Project B! It's a no-brainer!

However, the correct answer is – it depends. What simple ROI comparisons fail to take into account is the 𝗖𝗢𝗦𝗧 𝗢𝗙 𝗗𝗘𝗟𝗔𝗬. What if I told you that by doing B and not A, you are losing $1 million? This is because project A is a Christmas initiative, so delaying it by 3 months (even 2) results in all of the value being lost (if we start in October rather than August, we will miss Christmas – remember, it will take 3 months to deliver). The same time criticality does not apply to project B.

So, if we use ROI comparison – all other things being equal and ignoring other opportunities for now – we will choose to do project B only and make $10 million. If we consider COST OF DELAY, we will 𝗦𝗘𝗤𝗨𝗘𝗡𝗖𝗘 the projects rather than choose between them – thus doing project A THEN B, and make $11 million.

Of course this is a simplification, and in fact we need to bear in mind that doing both projects in this example costs twice as much (in time and $) as doing only one of them. That said, even if we knew project A would only took a few weeks to implement, we would still be ignoring it if judging purely on ROI, and it would still be too late to implement after doing B.

So the lesson here is to consider the 𝗼𝘃𝗲𝗿𝗮𝗹𝗹 𝗥𝗢𝗜 𝗮𝗻𝗱 𝘁𝗶𝗺𝗲 𝗰𝗿𝗶𝘁𝗶𝗰𝗮𝗹𝗶𝘁𝘆 𝗮𝗰𝗿𝗼𝘀𝘀 𝘁𝗵𝗲 𝗺𝗼𝘀𝘁 𝘃𝗮𝗹𝘂𝗮𝗯𝗹𝗲 𝗳𝗲𝘄 𝗼𝗽𝗽𝗼𝗿𝘁𝘂𝗻𝗶𝘁𝗶𝗲𝘀 rather than the ROI of each project in isolation.

*And given that we DON'T have perfect knowledge about how long things will take:
– make sure projects start WELL in advance of the anticipated implementation time before their value will be significantly diminished, and
– use schedule and value risk mitigation strategies such as capability slicing and MVP to increase the chances of maximising benefits.

Are you considering the cost of delay when prioritising initiatives in your organisation?

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