Implications of complexity theory on real option analysis in it portfolio management

John C. Burke, Michael Jeng-Ping Shaw

Research output: Chapter in Book/Report/Conference proceedingConference contribution

Abstract

In IT Portfolio Management, Real Option Analysis (ROA) and Discounted Cash Flow (DCF) analysis are often used to place a quantitative value on an IT investment. ROA is theoretically superior to DCF analysis because ROA specifically attempts to account for managerial flexibility or the ability of management to adjust to a changing situation. However, while DCF analysis has been criticized as undervaluing IT projects, ROA has been criticized as overvaluing them. One possible explanation for an upward bias in ROA is that it often incorrectly assumes that managers will be able to make follow-on investments to an IT project if that project is successful, (i.e. Growth options). Drawing from complexity theory and using project data from three large private organizations in the Mid-West we found that there was a log-linear relationship between the number of projects and SDLC phase. The implication is that organizations primarily using internal IT resources are only able to develop a small number of late stage projects at a time. This in turn has important implications for Outsourcing, IT project portfolio management, and ROA. Specifically many growth options used in calculating project value in ROA may be unrealistic given the limited resources of private organizations.

Original languageEnglish (US)
Title of host publicationAssociation for Information Systems - 13th Americas Conference on Information Systems, AMCIS 2007
Subtitle of host publicationReaching New Heights
Pages2826-2837
Number of pages12
StatePublished - Dec 1 2007
Event13th Americas Conference on Information Systems, AMCIS 2007 - Keystone, CO, United States
Duration: Aug 10 2007Aug 12 2007

Publication series

NameAssociation for Information Systems - 13th Americas Conference on Information Systems, AMCIS 2007: Reaching New Heights
Volume4

Other

Other13th Americas Conference on Information Systems, AMCIS 2007
CountryUnited States
CityKeystone, CO
Period8/10/078/12/07

Keywords

  • Complexity theory
  • It portfolio management
  • Real options analysis

ASJC Scopus subject areas

  • Computer Science Applications
  • Computer Networks and Communications
  • Information Systems
  • Library and Information Sciences

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