Monday, November 17, 2008

Real Options Process.

Last Tuesday I met with David Peterson at XTC. David asked me about a comment I had apprently made along the lines of "Real Options are a process". ( I trust David, but not my memory ).

Real Options are based on the three statements...

1. Options have value.
2. Options expire.
3. Never commit early unless you know why.

1. and 3. tell us we should defer our commitment until the last responsible moment. But what is the "last responsible moment"? To answer this, we look at statement 2. "Options expire ( or mature )"........ But what does that mean?

To illustrate this, we discussed getting home from XTC. Immediately we run straight into the another question. "What is the deadline or target?".... "We want to get home by XXX time, or by YYY condition." In fact, do we need to get home?

Often we discover that we do not NEED to get home or some other intermediate step, but rather the commitment is to be at work in a fit state by 9am the following day.

By pushing the commitment back and trying to identify the real commitment, we end up with a better understanding of our true goal. This is the first part of the process. Identify the true goal or commitment. In software development, this is often "Deliver the software AS SOON AS POSSIBLE.". More later on that

Lets assume that our goal is "Home by 1am to relieve the baby sitter." Now we know where and when we need to be. ( In production by December 1st )

For this we need to identify our options. For this, we start with the destination and work towards the origin ( City Pub ). This way we only consider valid options. Invalid options (that take too long) drop out as part of the process.

The last train (free as we have a travelcard) we can get leaves Waterloo at 12:00. A taxi from Waterloo takes 40 minutes costing £50, and from the City pub takes 35 minutes costing £55.

A train from Waterloo to "Town near home" leaves at 12:15 and takes 40 minutes followed by a 10 minute taxi ride costing £20.

To get to Waterloo from "City Pub", We can get the bus ( 30 minutes, £2 ), Taxi ( 5 minutes at £10 ), or Northern Line/Jubilee Line ( 15-20 minutes, Free! ), Waterloo and City Line ( 8 minutes ), etc., etc..

Traditional project management would identify that the cheapest, quickest route is Waterloo and City Line ( 8 minutes ) followed by train from Waterloo to home.

So the second step is identify the options and their costs. Note that this is an information hungry process. You will need to do more research, but we normally do this well away from the expiry date in what we call "slow time". Once we exercise the option, we are normally in "fast time" and go as fast as possible. The time to seek out and gather new information is very expensive during "fast time" and cheap in "slow time".

A Real Options process leaves that decision until the "last responsible moment." What does that mean? Well, obviously we do not want to pay more than we have to. Also, we want to hit our deadline.

First a word on costs. We should consider costs in two ways. In traditional "Cash out the door" cost management way, but also time. We should consider time as "fast time" (on the critical path ) and "slow time" ( off the critical path ).

We record the time and cost of each option, and work backwards to establish the possible routes. Then on the evening, we can decide on the best route. The best route will depend on a number of factors....

More later. I've done a spreadsheet for this example, just need to display the results.

36 comments:

ColtonSteigerwald0314 said...

如果你批評他人。你就沒有時間付出愛.........................

雪糕 said...

^^ 謝謝你的分享,祝你生活永遠多彩多姿!........................................

遊戲機 said...

每一粒厄運的種子,卻包孕著未來豐盛的果實........................................

憋不住 said...

我們唯一需要恐懼的事,是恐懼本身........................................

佳慧 said...

快樂的微笑是保持生命康健的唯一藥石,它的價值千萬,卻不要花費一文錢..................................................

佩昭彥怡 said...

hello~ nice to meet u..............

淑君淑君 said...

Nothing comes from nothing.......................................................

皓珊 said...

以簡單的行為愉悅他人的心靈,勝過千人低頭禱告........................................

美岑 said...

君子如水,隨方就圓,無處不自在。........................................

子凌50529nealsickles said...

人必須心懷希望,才會活的快樂,日子才過得充實,有意義,有朝氣,有信心。........................................

劉KarolR_Sundquis said...

After a storm comes a calm.

懿綺 said...

欣賞是一種美德~回應是最大的支持^^.............................................

偉誠 said...

命運,就是自己行為的結果。..................................................

怡潔向霖 said...

教育無他,愛與榜樣而已 ............................................................

ElwoodK_Rank佳玲 said...

you have a very successful business............................................................

RochelleP_Higginson瓊文 said...

人有兩眼一舌,是為了觀察倍於說話的緣故。..................................................

jackveronic said...

才華在逆境中展現,在順境中被掩藏。..................................................

貴寶 said...

所有的資產,在不被諒解時,都成了負債....................................................................

玫友 said...

河水永遠是相同的,可是每一剎那又都是新的。....................................................................

佩怡佩怡佩怡 said...

當一個人內心能容納兩樣相互衝突的東西,這個人便開始變得有價值了。............................................................

溫緯李娟王季 said...

君子立恆志,小人恆立志。.................................................................

玉婷良DGFHFJ瑋黃吳 said...

初次造訪,安安^^..................................................................

婉婷 said...

Offence is the best defence.............................................................

玉苓玉苓 said...

風平浪靜時,人人都可以當舵手.................................................................

瑩凱 said...

happy to read~ thank you!..................................................................

吳庭 said...

如果,人類也像鼠輩一般,花很多時間來吃飯和睡覺,一定會改善健康。 ............................................................

s陳andersr睿afae婷l said...

一個人想法的大小,決定他成就的大小。..................................................

孫邦柔 said...

耐心是一株很苦的植物,但果實卻很甜美。.......................................................

李家黃喬盈榮 said...

良言一句三冬暖,惡語傷人六月寒。......................................................................

思張張亦 said...

Lets cross the bridge when we come to it............................................................

謝俊林奕宏宏 said...

Judge not of men and things at first sight................................................

麗文剛文剛文剛玲 said...

君子遇窮困,則德益進,道益通。............................. ....................................

守何何何韋 said...

我在戀愛著?--------是的,因為我在等待著.....................................................................

阿袁袁袁袁華 said...

不論做什麼事,相信自己,別讓別人的一句話,把你擊倒。..................................................

偉DimpleHolloway043昀 said...

與人相處不妨多用眼睛說話,多用嘴巴思考............................................................

江仁趙雲虹昆 said...

生命所經歷的折磨愈多,其所產生的奮鬥力愈大。................. ................................................