The Hidden Costs of Product Development
We’ve all heard the saying “Hindsight is 20/20.” Well this certainly applies to product development - as Product Managers and leaders of product organizations, we can all think of a time when things didn’t pan out as we had expected. But, how many of us actually calculated the cost impact to the organization from those poor outcomes? My guess is not many of us have ever figured out just how painful it was financially to the org.
This article is an attempt to identify, quantify, and visualize the hidden costs that impact organizations from product development, and then provide some suggestions on how to approach minimizing these costs. Today we look at three scenarios that I assume has impacted us all:
1. Inefficient execution that leads to slow/delayed releases.
2. Building a poor product experience or the wrong thing for the wrong customers.
3. Hiring the wrong person or onboarding poorly.
Before we dive in, please note I have taken the liberty of simplifying the analysis with certain assumptions, in order to streamline the main points/arguments I’m trying to get across. There are certain process metrics/measurements that I will assume exist. In reality, not many organizations have these metrics in place, which is why Modern Product offers the services that we offer. But for this article’s sake, please be gracious in these assumptions and focus on the primary point (spoiler alert): It’s REALLY expensive to execute inefficiently or to make the wrong decisions! (not really a spoiler alert...)
Scenario 1: Inefficient execution that leads to slow/delayed releases.
Let’s assume your product team has a 3-month project to build out a new capability that has a decent revenue opportunity of ~$50k/week (incremental $2-3MM annual), with initial adoption forecasted at 10% week over week. Let’s also assume your team, today, executes at 50% efficiency and costs the organization ~$50k/mo in general base salary expenditures.
The question: How much are the hidden costs to the organization of the team running at 50% efficiency instead of, let’s say, 80%?
Well, a 3-month project executed at 50% efficiency means it will take the team 4.5 months to complete and launch. At 80% efficiency, it would take 3.6 months. This is a 0.9 month delta, which is where the hidden costs lie: additional costs to pay the team and the opportunity cost of lost revenue from the delay. (NOTE: there is also the opportunity cost of the team not working on the next big priority which I do not model in this analysis)
The analysis shows that it costs $49k to pay the team and that the company loses $18k in incremental revenue for that period of delay, for a grand total of $67,000.
Scenario 2: Building a poor product experience or the wrong thing for the wrong customers.
Let’s assume the team has recently released a new product capability to market that turns out is only 60% “on target” to your customers you expect to adopt*. Let’s assume there’s a decent incremental revenue opportunity of $50k/week (incremental $2-3MM annual), with initial (ideal) adoption forecasted at 10% week over week.
The question: How much does the organization lose in revenue if what’s built and released to market is only 60% “on the mark” versus 90% “on the mark”? And, how much does it cost to swarm/pivot to address the issue?
A product can be “off the mark” for many reasons, such as poor quality (instable, buggy, unusable), or simply that the wrong capability was built that doesn’t really address the true need of the customers. Whatever the reason, customer adoption will be impacted negatively which will have a negative impact on revenue opportunity. In this scenario, being “off the mark” by 30% resulted in a -22% impact in revenue over 8 weeks to the tune of $12,000. That’s just opportunity cost of lost revenue - we also must consider the costs of swarming to address the issue (and the disruption to the roadmap). A team that swarms to either address quality issues or to pivot the feature capability to better address the needs of the customer will likely spend several weeks, which, as shown in the last exercise, can easily add up to several $10’s of thousands of dollars.
All in, we’re likely talking $50,000-$100,000 of hidden costs.
* This is simply a score to illustrate that product releases can be “off the mark” in terms of the quality of the product UX, how well the feature set meets customers’ true expectations, or how well the *right* customers were targeted in the first place.
Scenario 3: Hiring the wrong person or onboarding poorly.
Let’s assume you hire a Sr. Product Manager at a base salary of $140,000, but that this person, for whatever the reason (poor fit or poor onboarding) ends up leaving the organization after 6 months. Assume it takes ~3 months to recruit, interview, and hire a new replacement for this role and that it takes ~3 months to reasonably onboard a new Sr. PM employee.
The question: How much does it cost the organization when the wrong person is hired into a leadership position like a Sr. Product Manager role?
In this scenario the analysis shows a 9 month period in which the product team is lacking a full-strength leader, which results in a -20% impact in efficiency of execution, which as we show in the first scenario results in hidden costs of extra execution and delayed releases. Additionally, there are operational costs incurred to recruit, interview, and hire a replacement Sr. PM (of the research I reviewed, I used a $7,000 estimate).
If you model out 9 months of inefficient execution of a product team, along with the additional costs of replacing that Sr. PM role, the hidden cost impact to the organization adds up to approximately $100,000!
The Punchline: It’s EXPENSIVE to execute poorly or make the wrong decisions.
Having worked in software tech for the last 18 years across several industries, all technology stacks, and every company stage of growth, I can say the scenarios I cover above are real and happen all the time. My guess is that you would agree, these are all too common issues that product organizations experience in the normal course of execution. Yes, these featured scenarios used hypothetical numbers, and big simplifications to how measurements were taken. All that being said, I believe the numbers are within reason and paint a picture that puts some quantification to what we all know intuitively, that it is very expensive to execute poorly and/or make the wrong decisions. To the tune of tens or hundreds of thousands of dollars!
Now What?
Obviously, the question is, how can we MINIMIZE these hidden costs our organization incurs BEFORE they come about? How can we avoid the “Hindsight is 20/20” moment of realization? Here is some practical advice that you can consider:
1) Establish the right measures - each scenario above assumed the ability to measure team efficiency, product quality or market fit, or hiring/interviewing or onboarding effectiveness. Do you have these types of measures in place organizationally? Are you actively working to optimize these measures? If not, this is the first step. Without the ability to baseline or benchmark how your organization is doing, you will have no clear idea of how, if at all, you are improving.
2) Consider bringing an outside perspective to the table - There are many benefits to bringing an external perspective to assist in optimizing execution efficiency, strategic decision-making, or even in hiring/onboarding practices. One major benefit is the very fact this person is external - unbiased, immune to internal politics, etc. Another benefit: if this external person can help you avoid these hidden cost scenarios, even just one, it is very likely the ROI to bring on this person will be very high.
If you are a Product Leader within your organization, consider how you can influence the changes necessary to identify, measure, and minimize these scenarios that ultimately cost your organization tens to hundreds of thousands of dollars. Keep in mind that Modern Product exists to partner with executives and product leaders as that outside, unbiased perspective with a ton of industry experience. We can help you measure and minimize these hidden cost scenarios to the tune of an ROI of 2-5x. Reach out today to explore how we can help!