Revisiting Flexibility in Design: An Analysis of the Impact of Implementation Uncertainty on the Value of Real Options

Abstract

Flexible design, often embodied as Real Options, has proven valuable in sustaining system performance under operational uncertainty. By building “options,” decision-makers buy the right, but not the obligation, to upgrade at a later time. Prior studies implicitly assume decision-makers can “call” the option in a timely manner, however, in most sociotechnical systems, this is far from certain. Budget cycles, supply chain logistics and separation of authority and budget lead to implementation delays. To test, we developed a Monte Carlo simulation of a representative Army vehicle project. We first replicate prior studies without implementation delays, then incorporate delays for comparison. Once added, the value of flexibility degrades rapidly. The rate of degradation varies based on the flexibility strategy. Our results suggest a need to consider implementation uncertainty in evaluating flexible design options and open a new path for matching flexible design strategies to anticipated sources of implementation uncertainty.