Optimizing an IT Project Portfolio with Time-Wise Interdependencies

Abstract

Little research has examined the relevance of real options for valuation of information technology (IT) investments for prioritizing a portfolio of projects. When the effect of project interdependencies is considered, the complexity of prioritizing even a small number of projects poses several challenges in applying real options. We develop a new methodology suite which integrates the results of real options analysis within a portfolio management framework. We propose a multi-period optimization model to combine the advantages of using real options analysis with the ease of an optimization program to help IT managers make optimal funding decisions. We demonstrate advantages over traditional methods by using data from a U.S. utility company. Our contributions are: (1) integration of real options analysis with portfolio optimization methods, so projects can be prioritized across a multi-period horizon, and (2) validation of our approach by showing its superiority over traditional portfolio management models.