Optimizing an Information Technology Project Portfolio with Time-wise Interdependcies

Although the use of real options for valuation of information technology (IT) investments has been well-documented, little research has been conducted to examine its relevance for prioritizing a portfolio of projects. When the effect of project interdependencies is considered, the complexity of optimally 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 make objective project funding decisions. Our integrated model helps IT managers make optimal project funding decisions. We demonstrate its advantages over traditional methods by using real world data from a utility company in the United States. The primary 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.