Acquiring Enterprise Systems as a Portfolio of Real Options

Abstract

The Department of Defense (DoD) has an enterprise architectural vision and an accompanying transformation plan. The enterprise transformation plan describes multiple individual projects and systems that collectively deliver the desired capabilities and enterprise architecture. These projects are performed over planning horizons that span several years or more. Deciding on what projects to invest in, when to invest in them, and whether to continue the investment as time progresses is a difficult problem because of the uncertainty involved in the operational environment, the technology, and the associated project risks. This paper argues that enterprise systems acquisition can be modeled using real options to obtain project valuations that consider the environmental uncertainty and guide acquisition decisions. Moreover, because the enterprise architecture involves many projects that are interdependent, a portfolio investment approach is called for. We present a real options framework to plan a portfolio of projects as a collection of compound real options. We illustrate how the model can be applied in a case study derived from the DoD's transformation plan. The model and method contribute an approach to value a portfolio of projects that intentionally creates options to preserve decision flexibility and acquire the target architecture's capabilities at lower cost and risk.