Applying Real Options to Flexible Systems Engineering: A Proof-of-Concept Study on Capability Acquisition of Tactical Data Links

Abstract

How do we show the value of flexibility in systems engineering? This paper is aimed at answering this question with a proof-of-concept case study, which applies flexible systems-engineering concepts to the design of solutions for providing improved Tactical Data Link (TDL) capabilities to the Close Air Support (CAS) mission and then compares the return on investment (ROI) of these solutions. Many flexible systems-engineering concepts can be viewed as applications of Real Options, where options represent valuable sources of flexibility designed into assets or activities of an investment whose payoff is strongly related to some uncertainties. Such sources of flexibility can substantially raise the investment's expected payoff, because they would allow the project to limit the downside risk while exploiting the upside potential. TDL systems can support the CAS mission by providing digital machine-to-machine target location, weapon aim points, and Blue Force situational awareness to reduce the risk of fratricide. Engineering a useful system would face uncertainties in technical development and implementation coordination with various components. Solutions have been proposed that incorporate flexibility into systems engineering strategies for responding to uncertainties. This paper presents an analytic method based on a Real Options approach for analyzing such solution strategies. The results show that flexible systems-engineering concepts embedded in a capability acquisition program can probabilistically enhance its investment value.