Software Growth Options

:Today’s business environment is characterized by global competition and buyers’ markets. Under such conditions, flexible response to changes in the environment is a key success factor for any firm. Consequently, there is increasing pressure for information systems to be readily adaptable to changing business processes. This paper investigates ways of introducing this aspect of IS extendability into quantitative IT investment decision models via the application of real options models. In particular, it examines methods for evaluating sequential exchange options in order to obtain estimates for the value of software growth options—that is, IS functions that are embedded in an IT platform and that can be employed once the particular base system is installed and their use is economically justified. On the basis of these models, we look at the determinants of the value of software growth options and draw general conclusions with regard to decision making in the field of IT investment.