Valuing the Advantage of Early Termination: Adopting Real Options Theory for SaaS

Abstract

Traditional financial methods such as net present value or discounted cash flow are strongly limited when evaluating IT with a high usage flexibility degree. Especially with SaaS, the option to adopt and quit these services short term cannot be valued adequately with traditional methods. Towards this end, theory provides the real option approach that allows for evaluating not only the costs and benefits, but also the flexibility of IS. However, in terms of IS research this theory is often applied in order to evaluate the option to grow or to defer. The advantage of early termination, such as with SaaS, has not yet been adequately studied. Therefore, this paper adopts the real option theory and transfers it to the purposes of early termination. Moreover, the impact of real options on overall service evaluation is impressively demonstrated by a case study. The paper aims to expand IS research on the use of real options in the context of SaaS decision-making.