Using Options to Manage Dynamic Uncertainty in Acquisition Projects

Uncertainty in acquisition projects and environments can degrade performance. Traditional project planning, management tools, and methods can effectively deal with uncertainties in relatively stable environments. But in more uncertain environments conditions can evolve beyond the assumptions used in preproject planning and require major deviations from initial plans. Important uncertainties often cannot be identified and described adequately during preproject planning to design optimal strategies. Therefore, rigid project strategies prepared solely on the most likely outcomes as perceived during preproject planning can result in sub-optimal performance. In these cases, acquisition planners must explicitly incorporate flexibility into project plans to keep effective strategies available until uncertainty resolves adequately to reveal the best choice. Options can provide an effective framework for designing, evaluating, and implementing flexible acquisition project strategies and therefore can improve project performance. A large complex defense project illustrates the potential and challenges of options and research needs to expand and improve their use to manage uncertainty. M aximizing the value of acquisition projects in dynamic environments is difficult partially because project managers must manage a variety of environmental and internal uncertainties as well as more common project complexities. Miller and Lessard (2000) report that success for 60 large ($985 million average cost) engineering projects, including research and development projects, depended on how uncertainty was managed. Many large complex defense acquisition projects also include technology research and development in dynamic and unpredictable environments. These development efforts can pose significant risks for the entire project because their outcomes are often predecessors of major activities, and failures or delays in these efforts propagate through the project. How can managers of large complex defense projects plan for and manage critical uncertainties? TUTORIAL Using Options to Manage Dynamic Uncertainty in Acquisition Projects 243 Development projects risk suboptimal performance if uncertainty is not explicitly addressed in project planning. Many acquisition strategies are based on a project's characteristics and environment during front end planning. If these characteristics and environments are relatively stable, initial plans can absorb changes in the project or its environment, changes in acquisition strategies are not required, and traditional preproject planning is adequate. But some critical conditions evolve over time and the conditions, times, and managerial choices for effective decision making cannot be completely and accurately determined during preproject planning. Additional data collection can sometimes improve descriptions of apparently large uncertainties and thereby improve preproject planning. But traditional preproject planning can fail to develop adequate …