Architecting/Designing Engineering Systems Using Real Options

Abstract

Everyone concerned with engineering systems faces a common issue: How do we design systems to perform well in a constantly evolving and thus risky context? As professionals concerned with the system (rather than its individual pieces), this design issues predominantly relates to the overall configuration, the architecture of the system. This paper presents an approach to this fundamental issue. It suggests how we could architect flexible engineering systems that can evolve optimally to meet new challenges and opportunities. It suggests that the methods of “options analysis”-- that have revolutionized thinking about investments -- can provide a conceptual basis for defining optimal configurations. When these procedures are applied to design issues, they are generally known as "real options analysis". The fundamental result of "real options analysis" is the determination of the value of flexibility. It thus permits system designers and managers to decide which flexible design elements, that permit their system to evolve effectively over time, are worth their cost. It thus provides a clear rationale for when to design specific types of flexibility into the system.