Applying Real Options Thinking to Information Security in Networked Organizations

An information security strategy of an organization participating in a networked business sets out the plans for designing a variety of actions that ensure confidentiality, availability, and integrity of company’s key information assets. The actions are concerned with authentication and nonrepudiation of authorized users of these assets. We assume that the primary objective of security efforts in a company is improving and sustaining resiliency, which means security contributes to the ability of an organization to withstand discontinuities and disruptive events, to get back to its normal operating state, and to adapt to ever changing risk environments. When companies collaborating in a value web view security as a business issue, risk assessment and cost-benefit analysis techniques are necessary and explicit part of their process of resource allocation and budgeting, no matter if security spendings are treated as capital investment or operating expenditures. This paper contributes to the application of quantitative approaches to assessing risks, costs, and benefits associated with the various components making up the security strategy of a company participating in value networks. We take a risk-based approach to determining what types of security a strategy should include and how much of each type is enough. We adopt a real-options-based perspective of security and make a proposal to value the extent to which alternative components in a security strategy contribute to organizational resiliency and protect key information assets from being impeded, disrupted, or destroyed

Exploring ERP-enabled Technology Adoption: A Real Options Perspective

For decades, practitioners and scholars have focused on achieving optimal values in and benefits from enterprise resource planning (ERP) systems. Given that scholars have identified ERP systems as having option-like characteristics such as the capacity to create an information technology (IT) platform that enables the adoption of subsequent function-specific applications, we face a need to explore the linkage between post-ERP systems implementation and subsequent ERP-enabled technology adoption. We used real options theory to explore the underlying relationship between the initial ERP system implementation and subsequent technology adoptions. We surveyed 519 IT executives in the United States and found that the level of technology uncertainty, managerial flexibility, and formal real option analysis in ERP adoption decisions influenced the organizational relative advantage of subsequent non-ERP technologies. Our results also reveal that the level of uncertainty had a negative relationship with ERP-enabled technology adoption, while formal real option analysis in ERP adoption decisions positively influenced ERP-enabled adoption

Understanding the Information Technology Growth Options: Effects of Gender and Experience on Option Exercise Decisions

To account for managerial decision flexibility in risky IT investments, Real Option Valuation (ROV) has been advocated. ROV formalizes managers’ intuition, thus creating a disciplined decision making process. However, evidence suggests that ROV is usually utilized intuitively by professionals, in the form of “Real Option Thinking”, and is subject to various judgmental biases. We focus on growth options for this study. Prior research has shown that, while valuing projects with real options, managers ascribe the greatest importance to projects with growth options. Similar results hold for IT projects, where IT managers perceive a growth option as adding more value to the project. This perception of growth options might suggest their vulnerability to the IT managers’ risk preferences, through Prospect Theory. By conducting a survey-based experiment among 150 IT professionals, our results indicate that gender and experience impact biases in growth option exercise decisions significantly, depending on project size. However, we also observe some exceptions

An Alternative Method to Evaluate Complex Information Technology Projects

For most companies, it is a reality to face uncertainties when conducting complex projects focused on the implementation of Information Systems (IS) and, as a consequence, cost-benefit evaluation of this kind of projects has become a difficult task. In this context, Real Options Theory (ROT) has proved to be a viable alternative to provide methods to evaluate complex projects, not only in Information Technology but in many other economics and business areas. This paper intends to demonstrate how ROT can be applied to evaluate complex Information Technology projects, exploring a case study involving an implementation project of an Enterprise Resource Planning (ERP). In the case study, two distinct solutions for the implementation of an ERP were evaluated, demonstrating the applicability of ROT to such complex situations

Examining Real Options Exercise Decisions in Information Technology Investments

Researchers have advocated real options thinking (ROT) for evaluating and managing risky IT investments to account for managerial decision flexibility. Effective ROT is a three-step process that requires managers to recognize, value, and exercise options embedded in IT projects. Prior research has illustrated the existence of managerial bias in the recognizing and valuing real options. However, little research has examined real options exercise decisions. Hence, we use prospect theory to examine whether IT managers demonstrate systematic biases while exercising real options in IT projects and portfolios. We also study whether one can control or mitigate such biases. We found evidence of biased (suboptimal) real option exercise decisions in IT projects and in IT portfolios. However, we found differences in biased decision making between a single project and a portfolio scenario. We also found that project scale and real option type influenced vulnerability of a project to biased decision making. In addition, simplifying the presentation of the net effects of real options exercise decisions can help reduce bias, especially for large project portfolios. We discuss the implications of these results on theory and practice

Evaluation of the applicability of investment appraisal techniques for assessing the business value of IS services.

There is a consensus among academics and practitioners that ICT investments should be carefully justified, measured and controlled. This is not different for the development of a service architecture or the development of particular services as such. In practice, the traditional capital investment appraisal techniques (CIAT’s) such as payback period or net present value are by far the most used techniques for assessing the feasibility of ICT investments. Nevertheless, serious doubts about the fitness of these techniques in a service based value net environment arise. Value nets have special characteristics such as high flexibility and agility, re-use of services,… that makes the use of these techniques very difficult and the reliability of the outcome most uncertain. Efforts are made to find more appropriate techniques. In the past, CIAT’s have been adjusted so that these techniques become more reliable in an ICT environment and new justification methods and techniques have been developed. However neither these adjusted techniques nor the new techniques are frequently used. This might be explained by the fact that the outcome of these techniques is difficult to interpret and to use and the fact that some significant problems (like the estimation of hidden costs) remain unsolved. Moreover, most of the new techniques are still in the conceptual phase. In this paper we evaluate these adjusted and new techniques in the light of service oriented architectures. We will argue that non of the techniques offers a good solution for assessing the business value of IS services. Despite the existence of a wealth of literature, the IS community appears to be no nearer to a solution to many problems associated with ICT appraisal. This is potentially problematic when dealing with investments in emerging technology such as IS services or service architectures. Since all techniques presented in the article have their drawbacks, it is safe to say that reliance on a sole technique may lead to sub-optimalisation or even failure. Therefore it makes sense to use a mixture of techniques, eliminating or diminishing the weaknesses of each of the techniques used. We strongly recommend a multi-layer evaluation process, or an evaluation process derived from the balanced scorecard, for the appraisal of investments in services or service architectures.

A fuzzy real option approach for investment project valuation

[[abstract]]The main purpose of this paper is to propose a fuzzy approach for investment project valuation in uncertain environments from the aspect of real options. The traditional approaches to project valuation are based on discounted cash flows (DCF) analysis which provides measures like net present value (NPV) and internal rate of return (IRR). However, DCF-based approaches exhibit two major pitfalls. One is that DCF parameters such as cash flows cannot be estimated precisely in the uncertain decision making environments. The other one is that the values of managerial flexibilities in investment projects cannot be exactly revealed through DCF analysis. Both of them would entail improper results on strategic investment projects valuation. Therefore, this paper proposes a fuzzy binomial approach that can be used in project valuation under uncertainty. The proposed approach also reveals the value of flexibilities embedded in the project. Furthermore, this paper provides a method to compute the mean value of a project’s fuzzy expanded NPV that represents the entire value of project. Finally, we use the approach to practically evaluate a project.[[incitationindex]]SCI[[booktype]]紙

Managerial risk in information technology investments : effects of framing, narrow framing and time inconsistent preferences on real options exercise decisions

Real options theory has been advocated as a solution to risky IT investment decisions. IT investments decisions are risky due to uncertainty around future outcomes and the inability of traditional financial measures (like NPV, IRR) to account for inherent managerial flexibility. On the one hand, it is argued that real options analysis captures and formalizes managers' intuition, hence creating a disciplined decision making process. On the other hand, the intuitive valuation of the options is criticized due to the prevalent effects of various judgmental biases. In this dissertation, we explore three potential biases that can affect the real option exercise decisions in terms of either suboptimal option exercise choice due to framing and narrow framing effects, or suboptimal exercise time due to time inconsistent preferences of IT managers. We test for framing effects in individual IT project decisions and narrow framing effects in IT portfolio decisions, by conducting an online experiment among top and mid-level IT professionals. The results show that IT professionals are prone to framing real options at exercise time and simplifying complicated real option exercise decisions by isolating them in IT portfolios. Further, their decisions are influenced by their personal risk preferences. We analyze the effect of time-inconsistent preferences of present-biased managers on the exercise time of real growth and abandonment options and the realized values using a discrete time option valuation model. The results show that present-biased managers are more likely to exercise growth options early when the net payoffs are low, the growth option payoffs have high volatility, and the risk free discount rate is small. Also, present-biased managers are more likely to exercise abandonment option late when the net payoffs from continuing the project are high, salvage value of the project is low, and the rate of change in the salvage value over the period of time is low. In addition, present biased managers are more likely to exercise a growth option early in its life when the project is performing well. We provide implications for practice and IT governance

Towards a framework for a continuous it investment valuation

The goal of this article is to contribute to the decision of how to analyse and evaluate the economic impact when deploying large IT solutions. For that purpose, we present a framework, which can be applied by carrying out the following steps: At first, important preconditions and assumptions concerning the IT solution have to be collected. Then, key factors, derived from the results of the previous step, can be identified. Finally, these factors have to be evaluated and, if possible, quantified and measured. Consequently, these steps have to be embedded in the development process of the IT solution. We describe a procedure model, based on the stages plan, do, check, act, which can be used to carry out a structured analysis taking into account the whole life cycle of the deployed IT solution, including an ex-post analysis. As foundation of the framework, we provide a classification of key factors of IT benefits and risks based on literature and case study review

Management of ERP implementation

Implementation of Enterprise Resource Planning (ERP) solutions, which involve both technical and social uncertainties, is in practice a highly uncertain, risky endeavour. Traditional ERP practices address implementation of ERP as a static process; such practices focus on structure, not on ERP as something that will meet the needs of a changing organization. As a result, many relevant uncertainties that cannot be predefined are not easily accommodated. Options theory, which addresses uncertainties over time, resolves uncertainties in changing environments that cannot be predefined. In this paper, we propose an options perspective on the ERP implementation process with a focus on uncertainty. This perspective takes into consideration the often-changing nature of the companies that undertake ERP implementations. In addition, we present a practical example that demonstrates how to use options theory in context, enabling active management when implementing ERP. By actively managing ERP implementation, management can improve the flexibility of ERP implementation and can take appropriate actions to respond to the changing ERP implementation environment, to achieve more a successful ERP implementation that better meets the needs of the organization