The Optional Value of IS Projects - A Study of an IS Portfolio at a Multinational Manufacturer

The IS research literature has tested the applicability of option pricing models to IS projects mostly through detailed case studies. The current study complements this literature by considering a wide set of IS projects and assessing, albeit crudely, their optional value. We test the literature’s assumption that IS projects embed significant optional value. Our research site is a European plant of a leading multinational manufacturer of sophisticated products. The portfolio of current and recent IS projects is studied through a questionnaire administered to all project managers. Seventeen project managers were interviewed concerning thirty-one projects with median cost of $325k and median benefit of$1.2m. We find strong support to the prediction that IS projects include considerable optional value. The thirty one projects we studied embed forty seven options, many of them with benefits comparable to the value of the original projects. Only four projects had no optional value. A comparison between a subset of the portfolio and the corresponding scale-up options shows that the exercise price of the options is 20% of the original projects’ cost, and that the value of these options is about 70% of the original projects’ value. This data also demonstrates the large return, of scale-up options – the median return is 1500%, five fold the median return of projects. The main practical implication of this study is that real option evaluation is useful for IS projects in general, and should not be confined to special cases. A further implication is that real option thinking may be of particular value in recognising reduction and deferral options. The project managers in our study found such options difficult to identify and considered their time to expiration as relatively short. Proactive management of reduction and deferral options should thus increase the flexibility and value of IS projects

An Exploration of Enterprise Architecture Research

Management of the enterprise architecture has become increasingly recognized as a crucial part of both business and IT management. Still, a common understanding and methodological consistency seems far from being developed. Acknowledging the significant role of research in moving the development process along, this article employs different bibliometric methods, complemented by an extensive qualitative interpretation of the research field, to provide a unique overview of the enterprise architecture literature. After answering our research questions about the collaboration via co-authorships, the intellectual structure of the research field and its most influential works, and the principal themes of research, we propose an agenda for future research based on the findings from the above analyses and their comparison to empirical insights from the literature. In particular, our study finds a considerable degree of co-authorship clustering and a positive impact of the extent of co-authorship on the diffusion of works on enterprise architecture. In addition, this article identifies three major research streams and shows that research to date has revolved around specific themes, while some of high practical relevance receive minor attention. Hence, the contribution of our study is manifold and offers support for researchers and practitioners alike

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