Risk management and valuation of real options in IT projects: An exploratory experiment

IT project performance is influenced by the fit between the project's risks and how the IT project risk is managed (Barki et al. 2001). Recently researchers have emphasized the need to use concepts from real option theory for risk management purposes (Boehm 1989, Benaroch 2002, Kumar 2002, Miller et al. 2003). A project embeds real options when managers have the opportunity but not the obligation to adjust the future direction of the project in response to external or internal risks. Proactively embedding options in a risky IT project can represent a substantial portion of a project's value. From a risk management perspective, the specific risk one seeks to control dictates the choice of which specific options to use. Recently, Benaroch (2002) proposed an explicit normative option based risk management model suggesting the most effective risk-options combinations. This paper describes an exploratory experiment that was conducted to determine whether IT professionals explicitly recognize that the value of flexibility, related to different types of options, is driven by the presence of specific risks. The results partially indicate support for the risk-options relations as proposed by Benaroch (2002).