I’m currently reading an interesting book called ‘Real Options: Managing Strategic Investment in an Uncertain World’. A theme of the book is that having flexibility and options create value and that therefore such factors need to be taken into account as much as any ROI, TCO or ROA analysis and that actually using only such models could actually seriously underestimate what option values exist.
For most IT managers, Real Options will not be familiar. It is used extensively in the finance vertical where an “option” contract on a given stock enables (but does not mandate) the contract holder to buy a fixed number of shares of the stock at a specified date for a specified price. Real Options substitutes nonfinancial, or real, assets for financial ones.
The end goal is to create a situation in which a company is able to benefit from the upside potential of a project, software etc, whilst controlling downside risks. Much of the premise of Real Options for IT is based around an incremental investment policy. An example would be the deployment of a Customer Relationship (CRM) management system. If you spend a small amount on a comprehensive study of that CRM system and the results are not encouraging then any losses are minimal as compared with proceeding with an Enterprise wide CRM project. Alternatively if the results look encouraging, the investment in that study has a value gain . This value can be established using a financial markets proxy and valuation tools that originate from financial markets according to Amran & Kulatilaka, the authors of the book.
Lets look at a real world project in terms of GigaSpaces and the Cloud. Recently we had a UK Telco outsource one of their services to the Cloud. I have blogged about this previously. The aim of the Cloud deployment was to market an entirely new service which had unknown business value. The company already use GigaSpaces in their internal data centers so could have easily built this in-house, but the estimated cost to do this in terms of hardware, environmental setup and test was in the hundreds of thousand of dollars. There was also the issues of other projects competing for the same resource so that the delivery data would have been pushed out. The Cloud option enabled the company to have the flexibility to make a choice and GigaSpaces XAP was an enabler in regards to the agility to make it happen.
So far so good, we expect the flexibility and agility from anything Cloud. What else ? Well, the actual cost of getting the application on the Cloud was a few hundred dollars rather than a few thousand dollars. This was a huge saving and demonstrates the economic impact that using the Cloud can have. As it turned out, the actual service did not have the huge amount of traffic expected and in fact it was found that it was going to take a more focused marketing campaign with a wider visibility to get the service being used as anticipated. The Cloud instances that were being used were scaled back as the expected load and use did not materialize.
This is a great demonstration of how the use of options and flexibility created value. As GigaSpaces XAP 7 is an enabler for Organisations to deploy and manage the same application to the Cloud or internally which gives project planning / deployment flexibility as well as investment options that traditional static middleware does not have. This type of value will not appear on any NPV but it is tangible and real nevertheless. The differential between a few hundred dollars and a few hundred thousand dollars demonstrates this.
GigaSpaces ability to scale on demand can also be factored into the Real Option methodology. The ability to use GigaSpaces unique scale on demand features enables systems to scale to deal with growth in real time. The difference in investment between using GigaSpaces as a single node and GigaSpaces scaling out to support growth is essentially the real option price. Factor in revenue that is enabled by this dynamic scalability and one can see the tangible asset that is underpinned by GigaSpaces XAP.
The dynamic nature of Cloud infrastructure and the dual deployment features of GigaSpaces XAP make a killer combination with a TCO & ROI value that can easily be established but that have a value far above and beyond that.