Valuation of Capabilities and System Architecture Options to Meet Affordability Requirement

Abstract

Weapon systems are designed for very long operational lives, which exposes them to risks of technological and operational obsolescence that can greatly shorten their expected operational life, increase their operational costs, or diminish their performance. What is needed are systems designed so that during their operational life they can be adapted to changes in their environment to continue delivering value. One way to do this is via architectural options that create the ability for a system to adapt at a relatively low cost to possible future scenarios. An architectural option is the intentional design of a system to accommodate change. The issue is that incorporation of options into a system architecture costs money and current valuation methods do not adequately evaluate the costs and benefits of these options. This paper analyzes the valuation problem of architectural options using real options theory. A problem is used to illustrate how architectural options can be defined and the method for valuation of the options to assist decision-makers in determining whether to incorporate the architectural option or not. The research contributes to performance of trade studies in acquisition through the definition of architectural options in terms consistent with defense acquisition (capabilities and not cash flows) and a theory for how program managers can value the capabilities those options provide. The research is intended to support the evolutionary acquisition of system capabilities.