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The traditional real options valuation methodology, when enhanced and properly formulated around a proposed or existing software investment employing the spiral development approach, provides a framework for guiding software acquisition decision making by highlighting the strategic importance of managerial flexibility in managing risk and balancing a customer's requirements within cost and schedule constraints. This article discusses and describes how an integrated risk management framework, based on real options theory, could be used as an effective risk management tool to address the issue of requirements uncertainty as it relates to software acquisition and guide the software acquisition decision-making process.
Keywords: Risk Management, Software Acquisition, Strategic Investment, Evolutionary Acquisition (EA), Real Options Theory
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Software is currently the major expense in the acquisition of software-intensive systems (Figure 1), with its role as a technology platform rising from providing a mere 8 percent of weapons systems functionality in 1960 to over 80 percent of functionality in 2000 (Department of Defense [DoD], 2000).
Considering the immense presence and ever-increasing role that software plays in weapons systems, software is and should be treated as a capital investment; accordingly, an approach emphasizing a strategic investment methodology in its acquisition is necessary. This approach would emphasize the linking of strategic program management decisions to current and future unknown software requirements within the stipulated parameters of cost, risk, schedule, and functionality. This strategic program management approach is needed to align the software investment under consideration within the context of the overall portfolio of existing/planned software investments to ensure that synergies in efficiencies are leveraged in the delivery of the intended/desired joint capability.
The key to the implementation of a strategic program management framework is a disciplined requirements engineering approach that embodies a risk management-driven model in the acquisition planning process. This framework would link and build on two of the three key processes outlined in the 2009 Joint Capabilities Integration and Development System: requirements; the acquisition process; and the Planning, Programming, Budgeting, and Execution System.
Method
Risk management should be a consideration that is addressed much earlier in the software engineering process-at the acquisition level-during the investment decision-making activities prior to the commitment to acquire and/or develop a software system. The appropriate risk mitigation/reduction strategies or options...