7.500 Euro Loss

Hi,

Our intuition often plays tricks on us. Especially in statistics.

Humans are not made to intuitively understand statistical relationships.

For example, the Birthday Paradox .

What do you think? What’s the probability that in a room with 23 people, two have the same birthday? 5%? 10%? 20%?

…

Wrong.

The probability is 50%. If you look at two classrooms, statistically, one class will have a shared birthday.

In a room with 50 people, the probability is even over 97%.

That’s not intuitive. We humans just can’t grasp it.

This paradox also hits us in business. Especially when assessing the cost of free rework. We massively underestimate how much it costs us.

Here’s an example:

Suppose we sell a team of 10 people for half a year at a daily rate of 750 Euros. Roughly calculated, half a year equals 120 days - so our revenue is 90,000 Euros . Assuming personnel and overhead costs of 500 Euros, our expenses are 60,000 Euros . So, we expect to profit 30,000 Euros from the project.

But during the project’s acceptance, significant functionality losses are discovered. The team has to redo work. It takes three sprints to rectify all the deficiencies. Of course, the client doesn’t want to pay for it.

Your sales team goes along with it. We don’t want to scare away the poor client, do we?

And what’s three unpaid sprints in comparison to half a year’s revenue at a 33% margin?

And here again, our poor intuition strikes.

Three sprints are 6 weeks - that’s 30 days. 30 days with 10 developers cost us 15,000 Euros. But the opportunity costs – the lost revenue we couldn’t make during this time with the team – amount to 22,500 Euros. So, we’re looking at a total cost of 37,500 Euros for three sprints of unpaid rework.

Our project made a loss.

-7,500 Euros.

And we worked for 7.5 months.

That’s not intuitive.

And I see this happening over and over again.

For various reasons, rework is needed. Rarely because the team failed. More often, requirements weren’t captured correctly. The project scope was adjusted. Plans changed. Stakeholders didn’t cooperate. Acceptances were conducted too late.

But in the end, the sales team doesn’t want any bad blood. 6 sprints of rework are easily promised. Without a second thought.

Has this ever happened to you, ? Did you realize what it costs?

Hopefully, it won’t happen to you again.

Rule the Backend,

~ Marcus