Real Options Methodology Applied to the ICT Sector: A Survey

This survey focuses on the application of real options methodology to the information and communications technology (ICT) industries. It examines the development of the methodology to areas as diverse as wireless cell site investments to dynamic pricing issues. In addition to aiding the reader in understanding the breadth of the applications, it demonstrates the importance of the topic. It provides a guide to the reader who is interested in exploring the topic in greater depth.Discounted cash flow, economic methodology, information and communications technology (ICT), investment, investment under uncertainty, options, present discounted value, real options, valuations.

Insights from a Real Options Approach to Evaluate IT Sourcing Decisions

The trend for businesses to outsource information technology (IT) resources remains a relevant topic among IS researchers (Hirschheim and Lacity 2000, Kern & Blois 2002, Yost & Harmon 2002, Dibbern et al. 2004). While much has been written about outsourcing, the literature is relatively sparse when contemplating the issue of how organizations actually make their IT sourcing decisions. These sourcing decisions present the firm with opportunities such as abandonment, expansion, and deferment, that provide management the flexibility to improve their sourcing portfolios in the future. Real options theory has proven useful for valuing investments in IT infrastructure because it assigns value to future potential (Benaroch and Kauffan 1999, Taudes et al. 2000). This real options approach (ROA) is a promising technique for obtaining insights to sourcing decisions under uncertainty. This paper will relate the benefits of using real options analysis to evaluate the 5 stages of the IS outsourcing decision identified by Dibbern et al. (2004)

Value-at-Risk for e-business Project and Portfolio Appraisal and Risk Management

This paper makes the case for adopting a risk measure from the finance sector for the evaluation of eBusiness projects and portfolios. The proposed value-at-risk method constitutes a well-tested approach in high-risk environments, especially banking, and reports the expected maximum loss (or worst loss) over a target horizon within a given confidence interval. Value-at-risk is computed using either an analytical, parametric approach, or resorting to simulation, either based on historical samples or Monte Carlo methods. In this paper, both the use for evaluating single e-Business projects and also associated portfolios is discussed. Small examples are given and assessed to illustrate both applications. The main advantages of using value-at-risk measures are that they are methodologically consistent with modern IS evaluation approaches like real options, that they offer possibilities for management and assessment of project portfolios, and that the results are easy to interpret

Investment Evaluation Of RFID Technology Applications: A Real Options Perspective

The majority of previous studies on investment evaluation of RFID technology ignore the flexibility and the Real Options that this kind of investment can lead to. However, studies on the evaluation of other Information Systems have acknowledged the importance of these options as they create future business opportunities or give to managers the opportunity to take actions that could favorably influence the future direction of an investment in response to external or internal events. Drawing on literature from the Financial Field (Real Options theory) and Information Systems (IT investment evaluation), this paper has the aim to apply the Real Options approach to the RFID context through a case study example. This study shows how and why this approach is applicable to the case of RFID technology, underlining its necessity for the RFID investment evaluation

Információtechnológiai befektetési döntések: a reálopciós megközelítés helye az értékelésben

Munkámban az információtechnológiai befektetések értékelésének új, opciós megközelítésének elméleti és gyakorlati relevanciáját vizsgálom. Elméleti szempontból az opciós értékelési formulák feltételezései a komplex IT projektek esetében csak részben teljesülnek, és paramétereikre is csak speciális esetekben létezik megbízható becslés. Gyakorlati szempontból viszont a hagyományos diszkontált pénzáramlás alapú módszerek opciós kiterjesztése indokolt a jövőbeli döntési lehetőségek hozzáadott értékének figyelembevételére. Vállalati menedzsment nézőpontból azonban egyelőre csupán a kvalitatív stratégiai eszköztár kiszélesítésében kap helyet az opciós szemlélet. Ezen megállapítások alapján a következő problémák állnak jelen- és jövőbeli munkám fókuszában: (1) a komplex IT projektek jellegzetességeihez illeszkedő opcióértékelési formula (2) és ennek paramétereire a gyakorlatban könnyen alkalmazható becslési módszer keresése, (3) majd ezek összegyúrása a kvalitatív opciós megfontolásokkal. Munkám végén – az IT és a pénzügyi irodalom szintéziseként – megfogalmazott javaslataim lehetővé teszik, hogy a reál opciós értékelés egyrészt feltételezéseiben alkalmazkodjon az IT beruházások jellegzetességeihez (amerikai típusú lehívás diszkrét felülvizsgálatai pontokon, idővel változó beruházási költségek, speciális és többlépcsős begyazott opciók) és emellett megtartsa gyakorlati relevanciáját, viszonylag átlátható és jól kommunikálható számítási módszerek segítségével

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

Real Options Approach: a Bank Acquisition by Bank X

Indonesia offers a lot of promising growth opportunities and particularly to the banking industry, a combination of attractive macro-economic conditions and introduction of new regulatory policies as well as reformation to consolidate and strengthen the banking sector primarily by M&A activity provides an attractive backdrop for acquisition of Indonesian banks by foreign investors. In this paper, we introduce real options theory as an alternative to a traditional project valuation for a bank acquisition that would allow the acquiring firm to recognize the options embedded in their investments. The objective of this case study is to analyze, from real options perspective, whether the acquisitions of the target firm compliment the acquiring firm. The methods use for the analysis are DCF, Black-Scholes and Binomial Lattice that would help determine the project real value, which result suggested that the acquiring firm should reconsider their options. On this thesis, the DCF method suggesting that the acquisition of Bank Y by Bank X does increase the value of Bank X but there would not be added value on the synergy itself. While from the real options perspective, the project value (with and without real options flexibility) is worth less than the target firm underlying assets and has doubtful prospect