Exploring 'Real Options' In An Agile Environment

Introduction To 'Real Options'

According to the IIBA:

Real Options are used to help determine when to make decisions.

Real Options lets the decision makers focus their attention on the items that need to be decided now, at the last responsible moment. By focusing on the appropriate time for making a decision, items which are not needed can be delayed thus making the decision process much simpler.

In order to be agile, there is the need for flexibility. The question becomes how can the latest information be used for decisions in an orderly way without disrupting the planning? Decisions need to be made based on a logical framework and real options is one of the techniques that has been developed to do this.

In an Agile Environment, Real Options happen during regular planning sessions. In a Kanban Environment, Real Options happen during refinement and prioritization which occur every time the resources are available to pull new work. For the backlog, decisions about which story to develop are deferred until just before the coding starts.

Real Options Elements

Options

Every option should bring the most significant ROI possible. Every option or choice has value. An option is only an option if it can expire. If an option is taken, one or more other options are excluded. If a competing option is still available after the choice, then it was not paired with the right option. If there’s a "cannot" phrase associated with the option, then it isn’t an option. Options are only viable if they can be put into place.

Options Expiry

Options are available only until a point in time. You cannot wait indefinitely to make a decision. You can’t wait until you know everything. You have to make a commitment at some point. Ideally you continue to gather information until the first option expires to improve your chances of being right.

Commitments

Options must exist within organizational commitments, such as standard tools, acceptance criteria, and delivery. You need to deliver items from the backlog. How long can you wait until making the right choices? Real options can help determine the optimal waiting time. Never commit early until you know why. All options have a means or time when they expire, after which the choice is made for you instead of by you.

Right/Wrong/Uncertain

Most people want to make good decisions. But that often leads to most people making a wrong decision versus living with uncertainty. The need for certainty drives us to make decisions before we have to. Sometimes it drives us to make bad decisions.

Waiting helps us make better decisions. Knowing how long to wait helps us be more disciplined about waiting. And using the Real Options theory can help determine how long we can wait.

Strengths Of Real Options

• Making decisions is much easier when a simple set of information to follow is provided
• Much faster to make choices when the focus is on the immediate decisions
• Inform when, not how, to construct decisions
• Optimizes processes by forcing considerations of decision points and information arrival

Limitations of Real Options

• Not simple to comprehend
• Might be necessary to practice and study it for a more extended period
• Requires analysis of systems from the outputs to the inputs

In Summary

Real Options simplifies decision making by allowing the decision maker to focus on decisions that are needed now, instead of the entire project upfront. Thus, complexity is removed and allows decisions to be made based on events, time, or other constraints.

But Real Options isn’t the most intuitive way to think about decisions, which means while it simplifies the decision itself, the process supporting this technique isn’t simple and takes some time to implement well. The goal is to maximize the value that we derive from our decision making.