Justifying electronic banking network expansion using real options analysis

The application of real options analysis to information technology investme nt evaluation problems recently has been proposed in the IS literature (Cha lasani et al. 1997; Dos Santos 1991, Kambil et al. 1993; Kumar 1996; Taudes 1998). The research reported on in this paper illustrates the value of app lying real options analysis in the context of a case study involving the de ployment of point-of-sale (POS) debit services by the Yankee 24 shared elec tronic banking network of New England. in the course of so doing, the paper also attempts to operationalize real options analysis concepts by examinin g claimed strengths of this analysis approach and balancing them against me thodological difficulties that this approach is believed to involve. The re search employs a version of the Black-Scholes option pricing model that is adjusted for risk-averse investors, showing how it is possible to obtain re liable values for Yankee 24's "investment timing option, "even in the absen ce of a market to price it. To gather evidence for the existence of the tim ing option, basic scenario assumptions, and the parameters of the adjusted Black-Scholes model a structured interview format was developed. The result s obtained using real options analysis enabled the network's senior managem ent to identify conditions for which entry into the POS debit market would be profitable. These results also indicated that, in the absence of formal evaluation of the timing option, traditional approaches for evaluating info rmation technology investments would have produced the wrong recommendation s.