Real Options and Enterprise Technology Project Selection and Deployment Strategies

real options applied to technology projects, and quantifying the business value of information technology initiatives. He has more than 30 publications in scientific and technology journals, and three book chapters including a chapter on ROI analysis for e-business projects in the 2003 Wiley Encyclopedia of the Internet. Prof. Jeffery has also developed 14 original case studies that are used in the Kellogg MBA course he teaches on Technology Portfolio and Program Management, and the Kellogg executive program he directs called Driving Strategic Results through IT Portfolio Management. Innovation at the Kellogg School of Management. He has more than ten years of experience in product development and management in technology, telecommunications and wireless industries. Mr. Shah worked as an associate at the Telecommunications Development Fund (TDF), a venture MIS 3604 3 capital firm focused on early-stage telecommunications and technology companies. He holds a BSEE with Honors from the University of Houston and an MBA from the Kellogg Graduate Wisconsin. The author of numerous articles on such topics as the small firm effect, option trading strategies, and valuation, Dr. Sweeney has also been recognized as an outstanding teacher as evidenced by the 1995 Alumni Award for Teaching Excellence. The reality of most IT departments is that capital is limited, or rationed, so that positive net present value (NPV) projects are not always funded. In the present work we examine enterprise technology projects that have a positive traditional NPV. Incorporating real option value enables management to more objectively compare and rank projects in a capital rationed information technology portfolio management process, and decide upon the optimal deployment strategy for the project. The present work examines different phase-wise deployment strategies for large enterprise technology projects and incorporates real options into the decision making framework. We focus specifically on multi-stage options embedded in enterprise data warehousing projects (EDW). We also examine the lattice granularity necessary so that discrete time option valuation models more accurately describe large enterprise projects. Different deployment strategies with different underlying NPVs and volatilities are compared. These results show that the traditional NPV of a project combined with additional real option premiums can provide important insight into the selection and deployment strategy for a project. Our results are generalizable to a large class of IT investment decisions where managers may consider single-phase versus multi-phase deployment in the presence of project risk.