There was a classic #Noestimates post this week that said ...
Estimation locks down choices early through upfront t decision making, #NoEstimates preserves options. And attached the hashtag #RealOption
A real option is a choice made available with business investment opportunities, referred to as “real” because it typically references a tangible asset instead of a financial instrument.
Traditional methods of quantitative cost-benefit analysis, like Net Present Value (NPV) or Discounted Cash Flow (DCF), either ignore or cannot properly capture the needs of management for flexibility to adapt and revise later decisions based on the uncertainties found on all IT projects. Real Options can be used to address the gap found in traditional capital budgeting methods. Real Options the management the needed flexibility to take actions, in the presence of uncertainty, that itself emerges over time.
The term flexibility in the Real Options paradigm refers to the capability of responding to a change or new situation. This is the same paradigm of Agile software development where responding to change over following the plan is part of the original manifesto.
The notion from the #NoEstimates post that estimation locks down choices early and NOT estimating is the solution, and then somehow connects #NoEstimates with Real Options demonstrates the lack of understanding of how Real Options is based on estimating the choices that can be made as options in the presence of uncertainty.
Instead is providing how Real Options is applied to decision making int he presence of uncertainty for ICT (Information Technology and Communications) here's a reading list. Where there is a public link, it's included. Some require memberships (IEEE, ACM), which any credible project manager should have anyway. Here's a sample. If you google "Real Options software development" or "real options ICT" you'll find these and many dozens more.
- "Managing Requirements for Business Value," John Favaro, IEEE Software, March/April 2002.
- "Aligning Software Investment Decisions with the Markets," Hakan Erdogmus
- "An Investment Criterion Incorporating Real Options," Hirofumi Suto, James Alleman, and Paul Rappoport, Communications and Strategies, No. 72, 2nd Quarter, 2008, pp. 45.
- "Application of Real Options Theory to Software Engineering for Strategic Decision Making in Software Related Capital Investments," Albert O. Olagbemiro, Dissertation, Naval Postgraduate School, December 2008.
- "A Primer on Applying Monte Carlo Simulation, Real Options Analysis, Knowledge Value Added, Forecasting, and Portfolio Optimization, an Acquisition White Paper, Johnathan Mun and Thomas Housel, Naval Postgraduate School.
- "Capabilities as Real Options," Bruce Kogut and Nalin Kulatilaka, Organization Science, Vol. 12, No. 6, pp. 744-758.
Here's a Public Folder on BOX with 123 papers on using Real Options for making decisions on software development projects.
Real Options is about using estimates to make decisions in the presence of uncertainty, by assesing the options and the impact of those options of the possible choices to deliver the best value for the investment.
The notion that NOT Estimating is somehow associated with real options, or that decisions can be made in the presence of uncertainty without making estimates is a fallacy.
