Monday, March 2, 2015

Commitment, by Olav Maassen

This is a wonderful business book. It is also quite unusual. The (non-fiction) content is presented in a graphic novel style. I was a bit skeptical at first but it works very well. It overcomes one of the stumbling blocks to Goldratt's explanation of the theory of constraints -- here, the length and depth of narrative don't get overwhelming.  Maassen and his colleagues Chris Matts and Chris Geary use a very engaging approach to their topic. (Although Goldratt did go into far more depth in his text.)

That topic covered is the real options model. This approach has been used primarily in IT project management. Although folks have been writing about it since the late 1990s, it is not well known as a project management tool. This book seeks to explain the model and show how to use it.

Since most folks don't know about real options, instead of leaving you hanging, I'll say a bit about it if only to motivate readers to pick up this great book.

Most business folks understand at least the notion of financial options. Black, Scholes and Merton's model for pricing options won them (Scholes and Merton, Black had died by then) the 1997 Nobel Prize. The general idea was that given the current price of an underlying traded stock, the amount of time to expiration, the expected volatility of the stock price, and risk free interest rates, one could compute a fair option strike price.

Real options are the equivalent of the financial instrument taken to a project (the value of which takes the part of the underlying traded stock in a financial option). Importantly, if a stock option approaches its expiration date not in the money, it will expire un-exercised. So in a real project, if the expected outcome takes a turn for the worse, it too should not be exercised (i.e., the project would be cancelled, redirected, etc.).

Well now perhaps it is apparent why the graphic novel approach makes this much easier to explain. There's considerable emphasis and explanation of the importance of deferring decisions, also understanding risk in a project, and the difference between a commitment and an option.

If I'd have had this book a decade ago, it would have changed the way I approached project investment analysis at my job in a fundamental way.

For a reader who builds things, delivers things, or invests in things, this book is an eye opening introduction to an underused technique. This is a top-ten candidate for 2015.

By the way, a good follow-on read might be José Maria Gonçalves da Silva Prata Martins' thesis at Técnico Lisboa [1] because it covers real options applied to a real and significant project (the new Lisbon airport).

[1] Gonçalves da Silva, J. M. (2013). Real options as a tool for managing uncertainty in project management (Masters dissertation). Retrieved from,%2055583.pdf


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