Information technology portfolio management and the real options method (ROM): managing the risks of IT investments in the department of the Navy (DoN)
Davis, Jeffery P.
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The FY 2003 Federal Budget contains provisions for over $52 billion in IT investments. The Navy portion of those funds is over $5 billion. Rapid change and increasing uncertainty in the technology field has resulted in a high degree of financial risk associated with IT capital investment decisions. The Federal Chief Information Officer (CIO) Council has endorsed IT Portfolio Management (ITPM) as an approach for making IT investment decisions. This research draws upon ITPM implementation strategies currently employed by the DON and provides recommendations for managing the inherent risk in IT investments, specifically the application of the Real Options Method (ROM). ITPM provides a thoughtful framework for managing the capital investment process but still depends primarily on traditional methods such as EVA, IRR and NPV for evaluating IT investment alternatives. This study uses the Naval Supply Systems Command (NAVSUP) Automatic Identification Technology (AIT) program to illustrate how ROM can be utilized to supplement these traditional valuation methods and aid in managing investment risks. IT capital investments are inherently linked to organization strategy and the uncertainties that define the future. This study demonstrates how ROM can allow managers to capitalize on the uncertainties of IT investment decisions to implement organization strategy.
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