Using KVA and Real Options for IT Acquisition: Case Example

Abstract

This presentation reviews the use of Knowledge Valuation Analysis (KVA) and Real Options Analysis (ROAn) methodologies in information technology (IT) portfolio acquisition decision-making. The presentation provides an overview of the theory supporting each methodology as well as the operationalization of KVA and ROAn for use as practical tools in IT portfolio acquisition. We use a proof-of-concept case example to demonstrate how KVA provides comparable historical data for ROAn and also permits the monetization of ROAn discounted cash-flow inputs. The two software suites that support KVA (i.e., GaussSoft) and ROAn (SuperLatice) are reviewed in terms of their role in making the methodologies practical and scalable; their ability to maintain performance data on options over time will also be addressed. We conclude with the implications for this approach by addressing some common option valuation and risk challenges in the DoD acquisition environment.