Professor of Management Information Systems and Head, Department of Industrial Information Processing, Vienna University of Economics and Business Administration; Visiting Professor, Institute of Policy and Planning Sciences, Tsukuba University
In recent years, the use of option pricing models to support IT investment decisions has been proposed in the MIS literature. In this paper, we discuss the practical advantages of such techniques for the selection of a software platform. First, we argue that traditional quantitative approaches to a cost-benefit analysis give only a partial picture of such decision situations: due to the long planning horizon required because of the time-consuming and resource-intensive implementation process, it is not possible to exactly predict which applications will, in fact, run on the system over time. Thus, the investor is faced with the problem of valuing 'implementation opportunities.' We then compare different valuation techniques for this task and discuss their respective advantages and drawbacks. The practical advantages of employing such models are demonstrated by describing a real-life case study where option pricing models were used for deciding whether to continue employing SAP R/2 or to switch to SAP R/3.
Today's business environment is characterized by global competition and buyers' markets. Under such conditions, flexible response to changes in the environment is a key success factor for any firm. Consequently, there is increasing pressure for information systems to be readily adaptable to changing business processes. This paper investigates ways of introducing this aspect of IS extendability into quantitative IT investment decision models via the application of real options models. In particular, it examines methods for evaluating sequential exchange options in order to obtain estimates for the value of software growth options that is, IS functions that are embedded in an IT platform and that can be employed once the particular base system is installed and their use is economically justified. On the basis of these models, the authors look at the determinants of the value of software growth options and draw general conclusions with regard to decision making in the field of IT investment.