LAS2013 Thoughts: Real Options

Chris Matts gave a keynote at Lean Agile Scotland 2013 about Real Options.

Options have value. Options expire.  Don’t commit before you have to.

There is value in keeping options open as long as possible. Ideally you want to be right. If you can’t be right, it’s better to be undecided and wait than to make the wrong decision. However, people don’t like this uncertainty. This means there is a tendency to prefer to make a decision now, even if it ends up being the wrong decision, i.e. humans tend towards right, wrong, uncertain. If it’s not clearly the right decision, it’s better to wait to make the decision than to be certainly wrong…so we should keep our options open as long as possible. It can be worth paying extra to keep options open.

An example he gave was a friend whose son was due to go to secondary school.  They had three options: a top-class council school – good, free but with qualification, a good private school – good, paid-for, and the run-of-the-mill council school – free, guaranteed entry, but not very good.  Their preference was in that order, but they had to put a deposit down on the private school before they knew whether their son had entry to the top-class council school.  If they didn’t put the deposit down, and he didn’t get into the top-class school, he’d end up in the poor school.  If they did put a deposit down and he got into the top-class school, they’d lose their deposit, but they’d be protected in case he didn’t get in.  They decided the value of the deposit was worth the price to keep the option of the private school open, and it turned out to be the right decision as he didn’t qualify for the top-class free school.

This is where set-based development has its power. You decide when your decision point will be, and develop multiple options in parallel. At the decision point you review the options available and pick the best one. For example, Toyota use this on their car designs.  They will set the date at which the gearbox design has to be selected. They will have multiple gearboxes in development: the reliable one they’ve been using for years, a slightly experimental one which has been used in a couple of cars, a new fancy one which will be great if it works, but may not be ready in time. At selection time they will review the status of the different gearbox options and decide which one to go for. If it’s ready and dependable enough, they can use the new fancy one, but by having other options available, it’s not a disaster if it doesn’t work.

So next time you’re making a design decision, ask yourself whether you have to make that decision now, or if there’s a way you can keep your options open for longer until you have more information on which to base the decision.

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