Marc Wouters

2015

This study aims at connecting real options analysis as a valuation methodology with decision-making for shared-service organization projects. The shared-services model recently received growing interest in theory and practice as an approach to reduce costs in a globalized world with an increasing pressure for efficiency. In comparison to other sourcing strategies, the financial decision-making process for shared-service organization projects has received little attention so far. Based on a first approach for valuating shared-services projects by applying real option techniques from Su et al. (2009), a business case methodology was developed to determine the expected value for transition projects at shared-service organizations. Evidence from a real world case study at a large German corporation was used to demonstrate the challenges by applying a real option valuation for these projects. General results about the practicality of this method were derived. At the case company, real option analysis did not lead to a more accurate result of the project valuation comparing to a more common net present value approach. This study does not support the use of ROA for shared-service organization projects, as managerial flexibility seems to be restricted. Nevertheless, in other organizations with a higher managerial flexibility, which constitutes an essential basis for a more precise valuation result than with the net present value approach, real option analysis might be beneficial to deal with considerable uncertainty around investment projects.