Economics of Investments in Evolvable Architecture in Industrial Practice

Evolvable architecture provides flexibility to meet unanticipated requirements, shorten time to market and reduce development effort. Investments in evolvable architecture are large, lengthy and risky. Therefore, a decision to invest in evolvability is often postponed until maintenance cost significantly overtakes the development costs, and severely disrupts further developments. The economic benefits of investment in evolvability traditionally focus on cost reduction and underestimate its value of flexibility to facilitate earlier cash flow and enable development of unpredictable requirement changes that otherwise will mean lost market opportunities. This paper proposes a framework for determining the economic value of investments in evolvable architecture in industrial practice that are simultaneously subject to time-to-market, development effort, and market risk. The assessment is based on real options analysis, a financial valuation technique for valuing real assets under uncertainty. The paper demonstrates the framework on valuating an investment in software phasing out. Using the framework, the organization can assess similar investments in evolvability in the future.