Real Option Analysis in Digital Transformation Programs

In the digital transformation age, the majority of companies conduct digital transformation programs that usually have a long time horizon and consist of multiple sequenced Information Technology Investment Pro- jects (ITIPs). At the same time, approximately 25% of all ITIPs fail and further 50% do not achieve their objectives within the planned time and/or budget. These figures suggest that companies often misallocate their IT budgets, due to deficient economic analyses deployed in the planning and selection of ITIPs. One important but inadequately considered aspect in the valuation of ITIPs are managerial flexibilities that can but do not have to be exploited by the project manager during the runtime of an ITIP that is, real options to defer, abandon, or sequence ITIPs. To value such real options in ITIPs the majority of scientific approaches use standard financial option pricing models. These models, however, usually simplify the complexities of Real Option Analysis (ROA) based on assumptions that do not apply to real investments such as ITIPs. In an initial research project funded by the FWF, we critically analyzed these assumptions and proposed relaxed assumptions that better represent the characteristics of ITIPs. We further found that the assumptions adopted by existing ROA approaches in the literature generally fail to adequately represent the characteristics of ITIPs and consequently fail to accurately value ITIPs. The main goal of this proposed follow-up research project - which falls into the interdisciplinary scientific field of IS - is to develop and prototypically implement a novel ROA approach which paves the way for an accurate Valuation of Digital Transformation Programs (ROAVaDiTraP). Methodologically, the work will be based on the Design Science Research paradigm. Accordingly we itera- tively design, prototypically implement and evaluate a ROA approach that accurately represents the charac- teristics of ITIPs. By this ROA approach, we contribute not only to the IS but also to the Finance and Economics literature because the underlying relaxed assumptions seem to be general enough to apply to real investments more widely. ROA approaches are considered to be highly relevant for valuing ITIPs in practice but are currently not applied for two main reasons: (1) Managers are not satisfied with the results of current ROA approaches. (2) ROA approaches are too difficult to apply in practice. With the proposed research project on ROAVaDiTraP, we address both issues by providing (1) an approach for a more accurate valuation of Digital Transformation Programs and (2) a usable and accepted prototypical implementation including a GUI of the approach. We test usability and acceptance of the prototype including the GUI by means of workshops with experts from both academia and industry. To sum up, this research project is intended to increase the accura- cy and the acceptance of ROA for ITIP selection within digital transformation programs in practice.

The research project ROAVaDiTraP (Real Option Analysis for the Valuation of Digital Transformation Programs) aimed to develop an innovative approach to Real Option Analysis (ROA) that more accurately represents and evaluates the characteristics of Information Technology Investment Projects (ITIPs) within digital transformation programs. These programs consist of multiple sequential ITIPs, whose economic evaluation has often been flawed due to simplified assumptions and inadequate models. Given that approximately 25% of all ITIPs fail and a further 50% do not achieve their objectives within the planned time or budget, there was an urgent need for more accurate valuation methods. The project was successfully completed and achieved most of its objectives. A novel ROA approach was developed and prototypically implemented, based on "relaxed assumptions" specifically designed to better account for the unique characteristics of ITIPs compared to traditional models relying on standardized financial options. In particular, complex aspects such as market imperfections and uncertainties in cash inflows, cash outflows, and project runtime were incorporated into the modeling. With the successful development of a user-friendly prototype featuring a graphical user interface (GUI), the approach provides a practical solution for the economic valuation of digital transformation programs. This not only represents a significant advancement in the field of Information Systems but also contributes to the disciplines of Finance and Economics, as the developed assumptions and models are transferable to other real investments. Overall, the project demonstrated that the combination of more precise modeling and practical applicability significantly improves the evaluation and selection of ITIPs within digital transformation programs. With these results, the research project delivers a valuable contribution to strategic decision-making and the successful implementation of IT-enabled initiatives in practice.