Real Options
Real Options sets the moment at which a commitment has to be made, without saying which one to make. Every decision still open is held as an option and given an expiry, dated or conditional. The commitment is made just before the option disappears, at the last responsible moment: the last date on which the decision can still be made without extra cost. Chris Matts and Olav Maassen stated the technique in 2007 as three rules: options have value, options expire, never commit early unless you know why. The Agile Extension to the BABOK Guide notes that it is commonly used for refinement and prioritization. The name comes from corporate finance, where real options are valued with pricing models; the version used in business analysis keeps none of that mathematics.
Goal
Real Options sets the timing of a decision. For every decision still open, the technique establishes the date or the condition beyond which the choice disappears, then places the commitment just before that point.
Faced with incomplete information, a group commits too early to put an end to the discomfort of uncertainty. Matts and Maassen start from that aversion: a decision made too early is more likely to be wrong, because the information was not yet there. The technique reverses the order: the expiry first, the gathering of information second, up to that date.
The deliverable is a register of options: one row per open decision, its expiry, the last responsible moment that precedes it, the information that has to arrive before then and what it costs if the option closes.
The technique says when to decide and is indifferent to how the decision is made. The choice itself belongs to decision analysis: Real Options sets the day on which that evaluation has to be run, decision analysis chooses between the alternatives on that day.
Usage
When to use it
- Choice of supplier or of architecture under incomplete information: put a date on the expiry and investigate the candidates until then.
- Waiting on an external act: a standard coming into force, a committee ruling, the release of a version; the expiry attaches to that event.
- Commercial offer of limited validity: the expiry is dated and the cost of missing it can be put in figures.
- Irreversible and costly decision: a platform migration, a data format choice, a multi-year commitment.
When not to use it
- No new information expected before the expiry: waiting does not improve the choice, run the decision analysis now.
- Cost of keeping the option open above the gap between the alternatives: put a figure on it with a cost-benefit analysis and commit.
Description
The three rules
Chris Matts and Olav Maassen set out these three rules in 2007; the Agile Extension carries them.
Options have value. Keeping a possibility open gives room to manoeuvre: the team takes in a piece of user feedback, a technical finding or a change of need without undoing a commitment. Keeping two candidate integrations alive costs study time and sometimes development. That cost of keeping the option open is budgeted at the moment the option is opened.
Options expire. A possibility that never disappears never forces a decision, so it carries no value. The expiry turns hesitation into an option: it sets the point after which the choice disappears, which allows the decision to be scheduled.
Never commit early unless you know why. An early commitment stays legitimate when its reason can be named: a discount that expires, a team blocked until the decision is made, a component with a six-week lead time to order. The rule bars the commitment made to dispel discomfort, whose gain nobody can state.
The option and the false option
An option is a possibility the organisation holds: it can exercise the option or let it pass, and it knows when the option disappears. A user story is an option to implement a feature, which expires when the business need changes. Acceptance criteria are the option to write a given level of detail for that story. A hotel booking is an option to stay, which expires at 18:00 on the day of the stay, after which the night is owed.
The Agile Extension lists five situations that produce a false option: what the organisation does not know how to do, what it cannot afford, what it cannot carry out in the time available, what can be neither bought nor sold, what it has no tooling for. A variant that falls into one of them takes up a row in the register while giving the illusion of a choice. The test is applied when the option is opened: who would exercise this option, with what means, in what time?
Setting the expiry
In finance, an option's expiry is contractual and dated. In business analysis it is most often conditional: it attaches to an event whose date is unknown, the exhaustion of the year's budget, the release of a version, the departure of a partner. The Agile Extension calls determining the expiry the most important aspect of the technique.
It is worked out backwards. The starting point is the moment the commitment has to be met: the release to production, the signature, the placing of the order. From that, subtract the execution time that cannot be compressed: legal review, the supplier's delivery lead time, the duration of the integration. What remains is the last responsible moment. This reasoning back from outputs to inputs is what the Agile Extension flags as counterintuitive; it adds that the technique takes practice before it becomes a reflex.
For each option, name what has to be known before the last responsible moment and who will produce it: a technical trial, a costed answer from the supplier, an opinion from the regulator. The interval before the expiry becomes a programme of information gathering, with its tasks and its owners. When the information plainly will not arrive in time, the option is closed early and the fallback is named.
The commitment and its penalty
A commitment closes the other options and most often carries a penalty if it is not met. Three examples: the organisation's standard development language, the acceptance criteria finished before the planning workshop and the backlog items the team has committed to deliver. Departing from the first is paid for in risk and in maintenance; missing the last erodes the customer's confidence. Writing the penalty down makes the expiry enforceable: a date with no known consequence is renegotiated at every meeting.
The decision calendar aligns with the meetings that already exist. In an initiative run in iterations, the next chance to decide is the planning meeting; in an initiative run as a flow, it is the moment capacity frees up. An option whose expiry falls between two meetings is dealt with at the earlier one, which brings its last responsible moment forward by that much.
What makes the technique fail
The option nobody dated
A subject declared open with no expiry is a postponement. The register fills with deferred decisions that nobody can date. An option with no expiry, dated or conditional, leaves the register and is settled at the next meeting.
The commitment made by default
An expiry nobody is watching passes without a decision, and the fallback applies without anyone having chosen it or argued for it. Every row in the register therefore names an owner and carries a dated reminder at the last responsible moment. Watching the dates is the part of the technique that survives a change of person least well, because it produces nothing as long as nothing falls due.
The option nobody maintained
Keeping an option open takes work. Two integrations remain options as long as either could be delivered within the time available. If the team has investigated only the first, the second expired well before its date, without the register recording it, and the group still believes itself free to choose. The expiry review therefore covers two questions: has the date moved and is the option still exercisable?
The technique mistaken for the choice
A well-kept register says the day on which the decision has to be made and leaves entirely open the question of what to decide. Groups that stop at the register reach the expiry with no evaluation criteria and settle it under pressure. The date is there to schedule the evaluation, decision matrix, cost-benefit analysis or any other method, early enough for it to hold.
AI considerations
A language model prepares the register. From a backlog export, a workshop record or a discussion thread, it extracts the decisions left open, which a manual sweep misses because an open decision is rarely written as one: it turns up as "we will see with the supplier" in the middle of a record. For each row it then proposes a form of words for the expiry and the missing information that goes with it.
Watching the dates can be delegated too. An agent connected to the calendar, to the validity dates of offers and to contract tracking flags the last responsible moments that are approaching, a repetitive task whose neglect produces the commitment made by default.
Setting the expiry cannot be delegated. It rests on internal facts the model does not have: the terms of a contract, the regulator's calendar, the delivery time a supplier will actually hold, the team's capacity next quarter. A model asked for an expiry produces a plausible date, with the same assurance as a verified one. The expiry is cross-checked against no other data in the register, so an invented date meets no contradiction there. Asked about an open decision, it recommends an alternative when the question was about a date. A register of options names the suppliers under consideration, the prices agreed and the points of regulatory dependency: its confidentiality is settled before anything goes out to an external service.
Examples
An online insurance company established in French-speaking Switzerland is building the onboarding process of its customer portal and has to choose its identity-verification provider. The register of options kept by the business analyst runs to three rows.
| Option | Expiry | Last responsible moment | Cost if the option closes |
|---|---|---|---|
| Integration of the biometric scanning provider | Dated: offer discounted to CHF 45'000 a year, valid until 30 September | 16 September, allowing two weeks for legal review and signature | List price of CHF 68'000 a year |
| SwissID integration | Conditional: the scope freeze for the quarter's go-live, whose date follows the delivery calendar | Ten working days before that freeze, the time to cost the integration, which cannot start before FINMA's guidance on the required verification level appears | Go-live pushed to the following quarter |
| Fallback: manual document checks by customer service | No expiry | Not applicable | 0.6 full-time equivalent in customer service for as long as it lasts |
The two expiries are independent: one is set by a commercial offer, the other by the delivery calendar. The regulator's guidance that the second option waits for has no known date. The team commits at whichever of the two arrives first, and the register puts a figure on what the wait costs in the meantime. On 16 September the comparison covers the options still exercisable: if FINMA's guidance has appeared, SwissID is among them, otherwise the row leaves the register before the evaluation.
Biometric provider
SwissID
Visualisations
The technique is drawn on a time axis. Each option takes its own row, from the day it was opened to its expiry. Those expiries do not coincide, which is what the drawing has to make visible. A marker placed shortly before the end of each bar carries the last responsible moment, and the area beyond the expiry is shaded. The register itself is a table.
Cost
| Phase | Level | Justification |
|---|---|---|
| Preparation | Low | The open decisions already exist, in the backlog and in the workshop records. Preparation amounts to extracting them and naming who answers for each. |
| Execution | Medium | Setting an expiry means reading contract terms, questioning a supplier and putting a figure on an execution lead time. This is the main outlay of the technique. |
| Documentation | Medium | The register lives at the rhythm of the planning meetings: each expiry is reviewed there and a conditional expiry is re-examined as soon as the event behind it comes closer. |
Tooling
Backlog management tools (Jira, Azure DevOps Boards and their equivalents) carry the expiry and the last responsible moment in two custom fields on the item concerned. The list becomes sortable by expiry during backlog refinement, which gives the meeting its agenda. Without those fields, the register lives alongside the backlog and the two diverge within a few weeks.
The spreadsheet holds the register when the decisions go beyond the scope of one team: choice of supplier, budget commitment, dependency between projects. It keeps the closed rows with the date and the reason for the commitment, material that feeds the recalibration of execution lead times.
The shared calendar carries the reminders: each last responsible moment becomes a dated appointment with a named owner.
The collaborative whiteboard (Miro, Mural and their equivalents) is used to draw the time axis in the session. Moving a bar in front of the group brings out disagreements over the expiry date faster than a discussion held over the register.
Contract management and the risk register feed the expiries: validity dates of offers, renewal deadlines, notice periods and risks whose materialisation closes an option are already tracked there. Risk analysis and management supplies the estimate of the fallback cost, which gives prioritization its order of magnitude.
Sources
- Chris Matts and Olav Maassen, "Real Options" Underlie Agile Practices, InfoQ, 8 June 2007: the original statement of the three rules, the link between aversion to uncertainty and early commitment as well as the explicit choice to leave out the valuation mathematics of financial options.
- IIBA, Agile Extension to the BABOK Guide, §7.12 Real Options: the purpose of the technique, the four elements (options, commitments, options expiry, right/wrong/uncertain), the examples of options and false options, the conditional expiry as the most important aspect, as well as the strengths and the limitations stated.
- Stewart C. Myers, Determinants of Corporate Borrowing, Journal of Financial Economics 5(2), 1977, 147-175: the origin of the term in corporate finance.