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A Real Options Model for Generalized Meta-Staged Projects---Valuing the Migration to SOA

Author

Listed:
  • Suvankar Ghosh

    (Department of Decision Sciences, Economics, and Information Systems, University of South Dakota, Vermillion, South Dakota 57069)

  • Xiaolin Li

    (Department of E-Business and Technology Management, College of Business and Economics, Towson University, Towson, Maryland 21252)

Abstract

This paper develops an innovative real options (RO) model for valuing multistage information technology (IT) projects that can be viewed as comprising meta stages. In RO literature, multistage investment programs have been treated as either interproject or intraproject programs, with intraproject programs being evaluated using n -fold Geske compound options and interproject programs valued using the so-called “subsidy-to-exercise price” logic. Our innovative RO model integrates the Geske compound option model with the subsidy-to-exercise price approach to value sequential investment programs that are neither purely interproject nor purely intraproject in nature but are composed of meta-stages. A meta-stage as a whole can be considered an interproject stage resulting in cash flows, but internally it consists of several intraproject stages that do not result in cash flows. We show that a key problem in IT, which is migrating to a Service-Oriented Architecture (SOA) for integrating a firm's many disparate applications, systems, data, and business processes, is best viewed as an investment program comprising meta-stages. Examining SOA migration from an RO lens is particularly apt at this time not only because of the importance of SOA but also because doubts have surfaced about the value of SOA. We illustrate our RO model by applying it to the simulated case of a firm migrating to SOA. We also develop a software tool based on the Mathematica TM computational platform so that practitioners can easily apply our innovative options pricing model to determine the true value of SOA in their business contexts.

Suggested Citation

  • Suvankar Ghosh & Xiaolin Li, 2013. "A Real Options Model for Generalized Meta-Staged Projects---Valuing the Migration to SOA," Information Systems Research, INFORMS, vol. 24(4), pages 1011-1027, December.
    • Handle: RePEc:inm:orisre:v:24:y:2013:i:4:p:1011-1027
    DOI: 10.1287/isre.2013.0488
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    References listed on IDEAS

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    1. Bruce Kogut & Nalin Kulatilaka, 2001. "Capabilities as Real Options," Organization Science, INFORMS, vol. 12(6), pages 744-758, December.
    2. Cassimon, D. & Engelen, P. J. & Thomassen, L. & Van Wouwe, M., 2004. "The valuation of a NDA using a 6-fold compound option," Research Policy, Elsevier, vol. 33(1), pages 41-51, January.
    3. Geske, Robert, 1979. "The valuation of compound options," Journal of Financial Economics, Elsevier, vol. 7(1), pages 63-81, March.
    4. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    5. Dean Paxson, 2007. "Sequential American Exchange Property Options," The Journal of Real Estate Finance and Economics, Springer, vol. 34(1), pages 135-157, January.
    6. THOMASSEN, Liesbeth & VAN WOUWE, Martine, "undated". "The n-fold compound option," Working Papers 2001041, University of Antwerp, Faculty of Business and Economics.
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    Cited by:

    1. Subodha Kumar & Yinliang (Ricky) Tan & Lai Wei, 2020. "When to Play Your Advertisement? Optimal Insertion Policy of Behavioral Advertisement," Information Systems Research, INFORMS, vol. 31(2), pages 589-606, June.
    2. Michel Benaroch, 2018. "Real Options Models for Proactive Uncertainty-Reducing Mitigations and Applications in Cybersecurity Investment Decision Making," Information Systems Research, INFORMS, vol. 29(2), pages 315-340, June.
    3. Hans Ulrich Buhl & Björn Steven Häckel & Florian Probst & Josef Schosser, 2016. "On the Ex Ante Valuation of IT Service Investments," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 58(6), pages 415-432, December.

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