Managing Information Technology Investments

Using a Real Options Approach

P. Balasubramanian, N. Kulatilaka, and J. Storck

Abstract

Investments in IT have become a dominant part of the capital budgets of many organizations. While the costs seem readily identifiable, many of the benefits are elusive. In this paper we develop a formal and practical methodology to evaluate information technology infrastructure investments. Our experience in using this approach has shown that it not only impacts the outcome but also improved understanding of how to align operating drivers with business capabilities and investment decisions. Thus, the real value of the real option approach is in how it informs the management process of IT investments.