IT applications portfolio management under business and implementation uncertainty



Corporations need to improve business processes in order to enhance velocity and service levels while reducing their processing costs and differentiating themselves in the face of competition. The levitation of importance beyond support roles has raised IT investment decisions to high priority in chief executive officers’ agendas. Corporate planning groups as well as lines of business are increasingly applying techniques of IT applications portfolio management in a more systematic fashion to improve decision-making and resource-allocation processes.

Recent advances in software engineering and IT service delivery methodologies have achieved the logical separation of business functions from implementation. This separation has made a new breed of innovative IT project possible with a new project risk structure; the adjustment of portfolio management techniques is appropriate. We present an integrated portfolio management model so that the corporation can focus on organic growth through sources at both the department and top management levels. The research gives clear advice as to how top management can seek economic growth by selecting an entrepreneurial strategic posture, implying a strong risk-taking propensity. By integrating a risk-return model and risk-tolerance paradigm to cope with today’s risk structure, overall capabilities can improve the decision process and the corporation’s performance as well. The application of the integrated technique to a Japanese manufacturing firm is described.


IT-investment management application portfolio management real options analysis risk-return model risk-tolerance paradigm timing decision 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. [1]
    Adler, R.W. (2000). Strategic investment decision appraisal techniques: the old and the new. Business Horizons, 43 (6): 15–22CrossRefGoogle Scholar
  2. [2]
    Amram, M. & Kulatilaka, N. (1999). Real Options. Harvard Business School Press, Boston, MAGoogle Scholar
  3. [3]
    Anand, J., Oriani, R. & Vassolo, R. (2006). Managing a portfolio of strategic growth options. Paper presented at the International Annual Conference of the Academy of Management, Atlanta, GA.Google Scholar
  4. [4]
    Aral, S. & Weill, P. (2004). IT assets, organizational capabilities, and firm performance: asset and capability-specific complementarities. CISR Working Paper No. 343, Cambridge, MA: MIT Sloan School, AugustGoogle Scholar
  5. [5]
    Benaroch, M. & Kauffman, R.J. (1999). A case for using real options pricing analysis to evaluate information technology project investments. Information Systems Research, 10 (1): 70–86CrossRefGoogle Scholar
  6. [6]
    Benaroch, M. & Kauffman, R.J. (2000). Justifying electronics network expansion using real option analysis. MIS Quarterly, 24 (2): 197–225CrossRefGoogle Scholar
  7. [7]
    Bhaumik, K. (2003). Unleashing value through portfolio analysis-an offshore perspective. Cognizant Technology Solutions. Available via DIALOG.
  8. [8]
    Black, F. & Scholes, M. (1973). The pricing of options and corporate liabilities. Journal of Political Economy, 81: 637–654CrossRefGoogle Scholar
  9. [9]
    Broadbent, M. & Weill, P. (1998). Leveraging the Infrastructure, How Market Leaders Capitalize on Information Technology. Harvard Business School Press, Boston, MAGoogle Scholar
  10. [10]
    Brynjolfsson, E., Hitt, L. & Yang, S. (2002). Intangible assets: computers and organizational capital. Center for eBusiness at MIT Sloan School of ManagementGoogle Scholar
  11. [11]
    Brynjolfsson, E. (1990). Information technology investments: guidelines for decision making. Journal of Management Information Systems, 7 (2): 9–28Google Scholar
  12. [12]
    Cornelius, P., Kogurt, B.M. (2003). Corporate governance in emerging markets: a key to competitiveness. World Economic Forum Knowledge Navigator. Available via DIALOG.
  13. [13]
    Copeland, T. & Antikarov, V. (2001). Real Options: A Practitioner’s Guide. TEXERE LLC, New York, NYGoogle Scholar
  14. [14]
    Dixit, A.K. & Pindyk, R.S. (1995). The options approach to capital investment. Harvard Business Review, May/June, 105–115Google Scholar
  15. [15]
    Doherty, N. (2002). Integrated Risk Management: Techniques and Strategies for Reducing Risk. McGraw-Hill, New YorkGoogle Scholar
  16. [16]
    Featherstone, A.M. & Moss, C.B. (1990). Quantifying gains to risk diversification using certainty equivalence in a mean-variance model: an application to florida citrus. Southern Journal of Agricultural Economics, December, 191–198Google Scholar
  17. [17]
    Garcia, P., Adams, B.D. & Hauser, R.J. (1994). The use of mean-variance for commodity futures and options hedging decisions. Journal of Agricultural and Resource Economics, 19 (1): 32–45Google Scholar
  18. [18]
    Glass, R.L. (2005) IT failure rates — 70% or 10-15%? IEEE Software, May/June: 110–112Google Scholar
  19. [19]
    IFPUG Counting Practices Manual, Release 4. (1995). International Function Point Users Group, Westerville, OHGoogle Scholar
  20. [20]
    Irani, Z., Themistocleous, M. & Love, P.E. (2003). The impact of enterprise application integration on information system lifecycles. Information & Management, 41 (2): 177–187CrossRefGoogle Scholar
  21. [21]
    John, H. & Singer, M. (1991). Unbundling the Corporation. Harvard Business Review, March/April: 134–141.Google Scholar
  22. [22]
    Jones, C. (1998). Estimating and Measuring SAP Applications with Function Point Metrics — Version 2, Feb 19. Software Productivity Research, Inc., Burlington, MAGoogle Scholar
  23. [23]
    Jones, C. (1991). Applied Software Measurement: Assuring Productivity and Quality. McGraw-Hill, New YorkMATHGoogle Scholar
  24. [24]
    Jones, C. (2000). Software Assessments, Benchmarks, and Best Practices. Addison-Wesley, Reading, MAGoogle Scholar
  25. [25]
    Kauffman, R.J. & Li, X. (2004). Technology competition and optimal investment timing: a real options perspective. IEEE Transactions on Engineering Management, 52(1):15–29CrossRefGoogle Scholar
  26. [26]
    Kirkwood, C.W. (1997). Strategic Decision Making: Multi-objective Decision Analysis with Spreadsheets. Duxbury Press, Belmont, Ca, ISBN 0-534-51692-0Google Scholar
  27. [27]
    Kumar, R.L. (1996). A note on project risk and option values of investments in information technologies. Journal of Management Information Systems, 13 (1): 187–193Google Scholar
  28. [28]
    Luenberger, D.G. (2002). A correlation pricing formula. Journal of Economic Dynamics and Control, 26: 1113–1126MATHCrossRefMathSciNetGoogle Scholar
  29. [29]
    Margrabe, W. (1978). The value of an option to exchange one asset for another. Journal of Finance, 33: 177–186CrossRefGoogle Scholar
  30. [30]
    Markowitz, H. (1991). Portfolio Selection: Efficient Diversification of Investment, Second edition. Blackwell, OxfordGoogle Scholar
  31. [31]
    Mason, R. & Weed, H. (2005). Can greater uncertainty hasten investment? University of Southampton working paper. Available via DIALOG.
  32. [32]
    McGrath, R.G. (1997). A real options logic for initiating technology positioning investments. Academy of Management Review, 22 (4): 974–996CrossRefGoogle Scholar
  33. [33]
    McGrath, R.G. & MacMillian, I.C. (2000). Assessing technology projects using real options reasoning. Research Technology Management, 43: 35–49Google Scholar
  34. [34]
    McDonald, R. & Siegel, D. (1986). The value of waiting to invest. NBER Working Paper No.1019. The Quarterly Journal of EconomicsGoogle Scholar
  35. [35]
    McFahlen, F.W. (1981). Portfolio approach to information systems. Harvard Business Review, 79: 142–150Google Scholar
  36. [36]
    Mun, J. (2005). Real Options Analysis: Tools and Techniques for Valuing Strategic Investments and Decisions. Wiley.Google Scholar
  37. [37]
    Oriani, R. (2006). Technology switch option and the market value of the firm: a model and an empirical test. Paper presented at the International Annual Conference of the Academy of Management, Atlanta, GAGoogle Scholar
  38. [38]
    Passori, A. (2004). Selecting the risk assessment method of choice. META Delta 2911. Available via DIALOG.
  39. [39]
    Peters, R.J. & Verhoef, C. (2008). Quantifying the yield of risk-bearing IT-portfolios. To appear in Science of Computer Programming. Available via DIALOG.
  40. [40]
    Raifa, H. (1968). Decision Analysis: Introductory Lectures on Choices Under Uncertainty. Addison-Wesley, Reading, MAGoogle Scholar
  41. [41]
    Renkema, T.J. (2000). The IT Value Quest: How to Capture the Business Value of IT-based Infrastructure. Wiley, Chichester, EnglandGoogle Scholar
  42. [42]
    Reyck, B.D., Lockett, M., Grushka, B.Y., Moura, M. & Sloper, A.C. (2005). The impact of project portfolio management on information technology projects. International Journal of Project Management, 23: 574–537CrossRefGoogle Scholar
  43. [43]
    Ross, S.A., Westerfield, R.W. & Jeffe, J. (2002). Corporate Finance, 5th ed. McGraw-Hill, Irwin, New YorkGoogle Scholar
  44. [44]
    Rubinstein, D. (2007). Standish Group Report: There’s Less Development Chaos Today. Software Development Times.Google Scholar
  45. [45]
    Schwartz, E.S. & Trigeorgis, L. (2001). Real Options and Investment under Uncertainty. MIT Press.Google Scholar
  46. [46]
    Seacord, R.C., Plakosh, D. & Lewis, G.A. (2003). Modernizing Legacy Systems. Addison-Wesley.Google Scholar
  47. [47]
    Smith, P.G. & Reinertsen, D.G. (1997). Developing Products in Half the Time: New Rules, New Tools, 2nd ed. John Wiley & Sons.Google Scholar
  48. [48]
    Taft, D.K. (2003). MicroFocus moves mainframe apps to .Net. Available via DIALOG.,1759,1372 573,00.asp Cited in August 2007
  49. [49]
    Taudes, A., Feurstein, M. & Mild, A. (2000). Options analysis of software platform decisions: a case study. MIS Quarterly, 24 (2): 227–244CrossRefGoogle Scholar
  50. [50]
    Torchiano, M. & Morislo, M. (2004). Overlooked aspects of COTS-based development. IEEE Software, March/April, 88-93Google Scholar
  51. [51]
    Trigeorgis, L. (1995). Real option: an overview. In: Trigeorgis, L. (eds.) Real Options in Capital Investment: Models, Strategies, and Applications. Praeger Publishers.Google Scholar
  52. [52]
    Trigeogis, L. (1996). Real Options: Managerial Flexibility and Strategy in Resource Allocation. The MIT Press, Cambridge, MAGoogle Scholar
  53. [53]
    Trigeorgis, L. (1996). Interactions among multiple real options. In: Real Options: Managerial Flexibility and Strategy in Resource Allocation, Chapter 7. The MIT Press, Cambridge, MAGoogle Scholar
  54. [54]
    Uhlrich, W.M. (2002). Legacy Systems Transformation Strategies. Prentice Hall.Google Scholar
  55. [55]
    Verhoef, C. (2005). Quantifying the value of IT-investments. Science of Computer Programming, 56: 315–342CrossRefMathSciNetGoogle Scholar
  56. [56]
    Verhoef, C. (2002). Quantitative IT portfolio management. Science of Computer Programming, 45: 1–96MATHCrossRefGoogle Scholar
  57. [57]
    Walls, M.R. (2004). Combining decision analysis and portfolio management to improve project selection in the exploration and production firm. Journal of Petroleum Science & Engineering, 44: 55–65CrossRefGoogle Scholar
  58. [58]
    Ward, J. & Griffiths, P.M. (1996). Strategic Planning for Information Systems, 2nd Edition. John Wiley & Sons.Google Scholar
  59. [59]
    Zahra, S., Hayton, J., Marcel, J. & O’Neill, H. (2001). Fostering entrepreneurship during international expansion: managing key challenges. European Management Journal, 19(4): 359–369.CrossRefGoogle Scholar

Copyright information

© Systems Engineering Society of China 2008

Authors and Affiliations

  1. 1.IBM Japan, Industrial Sector Marketing ExecutiveTokyoJapan
  2. 2.Graduate School of Decision Science and TechnologyTokyo Institute of TechnologyTokyoJapan

Personalised recommendations