Evaluating And Controlling IT Project Risk Based On Real Options

Information technology (IT) investment could offer various business opportunities for enterprises, such as reducing the inventory cost effectively, improving production efficiency, and facilitating better customer relationship management. Unfortunately, the productivity gains from IT investments may be neutral or negative due to the nature of high risks that characterizes most IT projects. Unsuccessful management of IT risk can lead to a variety of problems, such as cost and schedule overruns, unmet user requirements, and failing to deliver business value of IT investment. In this paper, an empirical study is conducted to identify the risks that exist in the enterprise IT projects, and Real Options theory from the financial field is introduced into the management of IT project risk. The structure of this thesis is organaized as follows:Firstly, a questionnaire is built and 128 companies in Hubei province are surveyed in this research. We expand the scope of the IT project risk, taking into account the market and competition risks that are usurally neglected by prior literatures, and identify 35 of the typical IT risk items. The factor analysis classifies these risks into seven categories, including organization risk, demand risks, users risk, technology risk, team risks, planning and control risk, as well as market and competition risk. We examine the relationship between the project performance and risks factors using regression analysis, find ample empirical support for the impact of the market and competition risks on the project performance.We present a comprehensive but simple methodology for valuating IT investment based on real options and fuzzy set theory. The valuation model we present is based on the assumption that the uncertainty of the expected payoffs from IT investments is not merely stochastic but also vague in nature. Fuzzy risk analysis is able to well formulate the uncertainty of the expected payoffs from an investment, moreover simplifies the real option model in certain degree. By incorporating the linkage among real option value and IT risk factors, this approach will help IT managers acquire a better-structured decision process in valuating IT investment.Effective management of risks in IT projects is extremely important. Most research related to IT risk management has been limited to risk reduction, which aims to reduce the probability of IT risks to the lowest point. Unfortunately, however, not all IT project risks can be eliminated by action and some of them require hedging. Therefore, an option analysis framework is developed to mitigate IT project risks. The proposed framework represents a systematic approach to identify shadow options that can be embed in IT project, and enhance the decision flexibility in project management to mitigate risks. The author presents an analysis on the value of hedging IT project risks using staging options. It's found that staging decision provides additional value for IT investment and is a good tool to hedge risks.And then, a risk-driven software process model is created by integrating risk management into spiral process model. We attempt to interpret theoretically the value of the spiral model in the real options framework. We adopt the time dependent volatilities compound real options model to describe multiple phase structure and the risk-driven nature of the spiral model. Finite differential approach is employed to get the numerical solution of the compound real options value. Using the multi-stage compound option model, the value of decision flexibility has been quantified. It is found that the spiral model excel other process model in uncertainty environment because of the decision flexibility embedded in its spiral project structure. The approach we present can help to understand and justify the spiral process in software project development. Besides, it is able to describe well the evolution of risk in the life cycle, and to provide references for the dynamic sequential decisions in different phases.In what follows, we discuss about how to use IT project portfolio management to diversify risk. A framework for designing IT project portfolio is developed by combining NPV method and real option analysis. The framework takes full account of the uncertainty and management flexibility, suggesting different implementation strategies to deal with different types of projects. It provides IT project managers a useful decision-supporting tool to formulate a reasonalbe project portfolio strategy.Finally, this thesis dicusses the main contribution of our research work and provides some possible future extensions.