Option-Based Risk Management: A Field Study of Sequential Information Technology Investment Decisions.

Author List: Benaroch, Michel; Jeffery, Mark; Kauffman, Robert J.; Shah, Sandeep;
Journal of Management Information Systems, 2007, Volume 24, Issue 2, Page 103-140.
This field study research evaluates the viability of applying an option-based risk management (OBRiM) framework, and its accompanying theoretical perspective and methodology, to real-world sequential information technology (IT) investment problems. These problems involve alternative investment structures that bear different risk profiles for the firm, and also may improve the payoffs of the associated projects and the organization's performance. We sought to surface the costs, benefits, and risks associated with a complex sequential investment setting that has the key features that OBRiM treats. We combine traditional, purchased real options that subsequently create strategic flexibility for the decision maker, with implicit or embedded real options that are available with no specific investment required provided the decision maker recognizes them. This combination helps the decision maker to both (1) explicitly surface all of his or her strategic choices and (2) accurately value those choices, including ones that require prior enabling investments. The latter permits senior managers to adjust a project's investment trajectory in the face of revealed risk. This normally is important when there are uncertain organizational, technological, competitive, and market conditions. The context of our research is a data mart consolidation project, which was conducted by a major airline firm in association with a data warehousing systems vendor. Field study inquiry and data collection were essential elements in the retrospective analysis of the efficacy of OBRiM as a means to control risk in a large-scale project. We learned that OBRiM's main benefits are (1) the ability to generate meaningful option-bearing investment structures, (2) simplification of the complexities of real options for the business context, (3) accuracy in analyzing the risks of IT investments, and (4) support for more proactive planning. These issues, which we show are more effectively addressed by OBRiM.
Keywords: datamarts;datawarehouses;investment valuation;ITinvestment;ITservices;options;riskmanagement;servicesscience
Algorithm:

List of Topics

#267 0.218 options real investment option investments model valuation technology value analysis uncertainty portfolio models using context intuitive managerial regret uncertain case
#264 0.097 risk risks management associated managing financial appropriate losses expected future literature reduce loss approach alternative mitigate failures failure cause mitigation
#137 0.087 phase study analysis business early large types phases support provided development practice effectively genres associated different sensemaking including form technologies
#6 0.074 data used develop multiple approaches collection based research classes aspect single literature profiles means crowd collected trend accuracy databases accurate
#246 0.068 strategic benefits economic benefit potential systems technology long-term applications competitive company suggest additional companies industry operating costs difficult substantial total
#147 0.063 process problem method technique experts using formation identification implicit analysis common proactive input improvements identify traditional stages identifying explicit setting
#0 0.059 information types different type sources analysis develop used behavior specific conditions consider improve using alternative understanding data available main target
#127 0.057 systems information research theory implications practice discussed findings field paper practitioners role general important key grounded researchers domain new identified
#114 0.054 performance firm measures metrics value relationship firms results objective relationships firm's organizational traffic measure market study improve accounting measuring aggregate