Dec 6 – Give me a basket of Real Options


Both Lean and in Agile we try defer decisions to as late as possible. We do this to make decisions when we have the most knowledge available to make that decision.

This all sound good and very logical when you read it like that, don’t you agree? So how come we seldom see a behavior like this in practice?

In most organizations I have worked with decisions are in contrast made as early as possible. Almost all companies I worked with have a yearly budget process. In this process they make decisions what should happen as much as 18 months in the future. Many of the organizations also have a very long, often stack ranked, product backlog that can stretch years into the future.

Why do we make so many decisions so early and with so little knowledge? It is probably due to our aversion of uncertainty as humans. We feel much better making a decision than being in an uncertain situation.

One way to both have the cake and eat it, is Real Options. With Real Options we can lock at every decision as Real Options. What Real Options tells us is:

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

Let’s take an example, a fruit basket (it may not be the best but I have to connect it somehow to today picture🙂 ).

You have bought the fruit basket to have a tasty and healthy afternoon snack every day. The fruit basket contains a number of different fruits in different quantities. When do you make the decision what to eat each day? Up front when you buy the fruit basket or each day? Most of us will do that on a daily basis because we intuitively see the choice as Real Options.

Each fruit has a value as it will fulfill your daily need of a tasty and healthy snack. But each fruits value will also expire (go bad). And the fruit will expire at different times depending of the type of fruit and its current ripeness.

So who should we decide on what fruit to eat?

In the first few days you can probably select any fruit that you like based on what you desire. But after a few days some of the fruits will soon start to expire. For instance, if you want to eat the bananas you probably need to eat them early on or they will expire. The apples you can probably leave in the basket for a bit longer. As you close up on the expiration date of the fruit in the basket you need to decide if you want to eat that fruit or let it expire. Your deferred decision in this example will let you select the fruit on a daily basis based on you would prefer that day but some of the fruits may expire select them too late.

In many cases this can be translated to business decisions as well. To make that easier to understand you need to make the value and when your options expires more explicit and visible. When you make this information explicit and visible you can with more confident defer your decisions with feeling as much uncertainty.

You can learn more about Real Options in the great book Commitment – the book by Olav Maassen and Chris Matts

This is my Lean/Agile Advent Calendar. I will publish a short post on a Lean/Agile topic every day up until Christmas. I will based each days topic on what is behind the door in the LEGO® City Advent Calendar.  So be sure to check back every day!

DISCLAIMER: LEGO® is a trademark of the LEGO Group, which does not sponsor, authorize or endorse this post and blog in any way.

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