Thursday, June 25, 2009

Risks, Real Options, and IT Projects

Project managers of IT projects are trying to find the right balance between analyzing risks and building flexibility in the project. Cokky Hilhorst did fundamenal research on this topic. She defended her dissertation "Reacting to Risks with Real Options: Valuation of Managerial Flexibility in IT Projects" very successfully at Tilburg University.

This dissertation investigates how managerial flexibility, as a response to risks, impacts IT project valuation. The dissertation attempts to answer this question by conducting three separate studies using a real options perspective. Firstly, we explore whether managerial flexibility in IT investment decisions is recognized in practice by conducting exploratory case study research. Secondly, we investigate how managerial flexibility in IT projects can be valued. We develop a theoretical decision-making model which deals with both financial and non-financial IT project valuation criteria and apply the model in a case study. Thirdly, we take a qualitative perspective on the management of managerial flexibility in relation to IT project risk. We empirically test the effects of specific risks on the valuation of real options in IT project decisions in an experimental setting. The primary contribution of this dissertation is to provide evidence that managers differentially assess the relative value of different types of options when controlling IT project risks. The relative value that IT professionals place on various real options is both driven by both the intrinsic real options value and by risk factors associated with an IT project. Their assessment generally follows real options-based risk management reasoning.

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