An Integrative Economic Optimization Approach to Systems Development Risk Management

Abstract

Despite significant research progress on the problem of managing systems development risk, we are yet to see this problem addressed from an economic optimization perspective. Doing so entails answering the question: What mitigations should be planned and deployed throughout the life of a systems development project in order to control risk and maximize project value? We introduce an integrative economic optimization approach to solving this problem. The approach is integrative since it bridges two complementary research streams: one takes a traditional microlevel technical view on the software development endeavor alone, another takes a macrolevel business view on the entire life cycle of a systems project. Bridging these views requires recognizing explicitly that value-based risk management decisions pertaining to one level impact and can be impacted by decisions pertaining to the other level. The economic optimization orientation follows from reliance on real options theory in modeling risk management decisions within a dynamic stochastic optimization setting. Real options theory is well suited to formalizing the impacts of risk as well as the asymmetric and contingent economic benefits of mitigations, in a way that enables their optimal balancing. We also illustrate how the approach is applied in practice to a small realistic example.