Using Real Options to Frame the IT Investment Problem*

budget of many organisations in both the service and manufacturing sectors. As a result decision-makers are faced with difficult questions: How should IT investments be designed and managed to ensure alignment with corporate strategy? How should such investments be justified prospectively, and how can success be measured retrospectively? What more (than technology) is needed to realise the full potential of IT? What are the risk implications of these investments? How can the value of IT investments be managed over time? These questions are not new, but they have not been answered satisfactorily. In this chapter we develop a formal and practical methodology to evaluate investments in information technology infrastructure. Determining the value of IT investments is inherently difficult. Although the costs seem readily identifiable, many of the benefits are elusive. For example, consider the investment in an electronic mail system within a geographically dispersed workgroup. As with many other infrastructure investments, attempting to justify e-mail on the basis of efficiency alone is likely to fail. E-mail may be a substitute for other forms of communication, but its real value comes as its use expands throughout the organisation and as other, more sophisticated applications are added to the basic e-mail platform. Specifically, e-mail within a workgroup may develop into a workflow management system across workgroups, which in turn can evolve into