Real options for project management
Last updated : July 2025.
The real options method has been in use for about two decades. Manufacturers aiming at improving the reliability of their strategic scenario simulations are keen on it. It is also penetrating the service sector. Other management techniques have already crossed over from one world to another (such as Lean or TRIZ, for example). Its impact at Volkswagen, for example, proved decisive during hard times. What is it? The method can be described from several angles.
Save money without pain
The idea is very simple: it involves identifying the project phases where the delay caused by a decision costs money. By decision, we mean, for example, stopping, pivoting, validating a hypothesis, allocating or withdrawing resources, or moving on to the next phase. By making the decision in question as soon as the information necessary to make it is available, we save money. How much? The product of the resource consumption rate (also called burn-rate) by the time saved on decision-making. Each milestone reached consolidates the vision of the phases remaining to be covered. Several scenarios are possible, each with their own decision-making paths. From the beginning of the project, the assumption is made that decisions are made on time. Therefore, the initial budget associated with each phase is optimized. If the reality of the project turns out to be different, then the rest is immediately recalibrated. Compared to the classic method of evaluating one and only one possible path, the gain is considerable. The decisive moments are identified as soon as possible. This stance is a matter of modesty, recognizing that uncertainty is inherent in every project. How many project managers can claim that they don't make decisive decisions, or few? How many can claim that they are not important, or even essential to the ultimate success? So why not anticipate them as soon as they are known?
Estimating uncertainty as accurately as possible
Each project is described by a graph on which phases (and not tasks) appear. Each phase leads either to one or more subsequent phases, or to a project stoppage. The branches of the graph carry the probabilities of moving from one phase to another, or of stopping. Once the budgets specific to each phase have been specified, an algorithm is used to evaluate the most probable value of the project at each stage. To do this, it takes into account the transition probabilities shown on the graph. Very well. But how do you estimate these probabilities? It is common in a classic approach to estimate tasks or phases. But it is less common to evaluate the chances of taking one branch or another. Practice shows that the same experts who know how to size phases feel very comfortable estimating transition probabilities. Gathered in co-creation workshops, they anticipate these key moments together, even if it means calling upon their memories of previous projects. Because situations repeat themselves and form experience.
SAFe, did you say SAFe, real options?
SAFe stands for Scaled Agile Framework. This project framework naturally adapts to the real options method. In particular, it codifies milestones and key stages. They can form the framework of a real options graph. It remains for the experts to possibly insert stages and variants specific to the context. And that's it. The practical benefits of the method are multiple. Let's take the example of a project leader who has the reflex to start by building a prototype. He or she intends to submit it to representatives of the target audience in a second phase. However, the prototype (or MVP) requires a budget of 100 while the survey can be done for 50. The successfull output probabilities of the MVP and the survey are low. By reversing the two phases on the graph, both probabilities increase sharply, while the budgets remain the same. Indeed, there is less chance of wasting the MVP budget for nothing if a survey is done first. Besides, there's nothing stopping you from doing another one afterward. Since the odds have increased, the project's value may remain higher after this addition.
An innovation project is a valuable asset
The further the project progresses, the more reliable the estimated value becomes. This behavior is similar to that of a stock or bond option. Except that here the underlying asset is not a financial security, but a project! In practice, the algorithm presents some differences compared to that of Black-Scholes, but the connection is there. NB: Black-Scholes is the name given to the formula for evaluating options by financiers. You don't need to understand it or be an expert in it to use real options. You just need to use the right software.
IPM and real options: a natural convergence
IPM stands for Innovation Portfolio Management. An innovation project is inherently uncertain. So rather than abandoning any form of financial forecasting, why not estimate it as accurately as possible using real options? The method is much better suited than traditional methods and produces much more reliable results. A real options analysis takes into account the four types of information available at the start of an innovative project. These are the known, the verifiable, the knowable, and the unknowable (see KPUU model, for Known, Presumed, Unknown, and Unknowable). Rather than considering that only the problem and the first solution path are known, the method anticipates. Real options for optimal investment strategies chase knowledge to transform it into value.
The software solution
Strategic Finance is a pioneer in implementing the real options method, offering an interface for defining, updating, and estimating the value of a project, portfolio, or portfolio grouping. Link to Strategic finance.