Managing information technology investments using
a real-options approach
, N. Kulatilaka, J. Storck
School of Management, Boston University, 595 Commonwealth Avenue, Boston, MA 02215, USA
Received 24 June 1998; accepted 21 August 2000
Investments in IT have become a dominant part of the capital budgets of many organizations.
While the costs seem readily identi®able, many of the bene®ts 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 options approach is in how it informs the management
process of IT investments. q 2000 Elsevier Science B.V. All rights reserved.
Keywords: IT infrastructure investments; Real options; Business capabilities; Investment management process
Investments in IT have become a dominant part of the capital expenditure budgets of
both service and manufacturing organizations. Managing IT investments is complex and
the implications of decisions are often not well understood. Frequently asked questions
include: How are IT infrastructure investments justi®ed? How do we design and manage
IT investments to ensure alignment with corporate strategy? How can we prospectively
justify these investments? What more is needed to realize the full potential of IT? How can
we retrospectively measure success?
While these questions are not new, they have not been answered satisfactorily. Recently
researchers have proposed the use of the real options approach to investment decision
making (Dixit and Pindyck, 1994; Kogut and Kulatilaka, 1994; Kulatilaka and Marcus,
Journal of Strategic Information Systems 9 (2000) 39±62
0963-8687/00/$ - see front matter q 2000 Elsevier Science B.V. All rights reserved.
PII: S 0963-8687(00)00038-X
* Corresponding author. Tel.: 11-617-353-4402; fax: 11-617-353-5003.
E-mail addresses: firstname.lastname@example.org (P. Balasubramanian), email@example.com (N. Kulatilaka),
firstname.lastname@example.org (J. Storck).