Managing High Uncertainty Projects - An Options Approach
Ronald Pierantozzi, PhD, Managing Partner, Cameron and Associates, LLC
Martha Collins, PhD, Director, Global Technology Centers, Air Products
This presentation describes a methodology that values projects by how they are managed, rather than their hoped for terminal values. Using a unique approach to creating and valuing flexibility in a project, we can determine both the optimal development path for uncertain projects and the value of that path.
Financial tools such as net present value (NPV) are flawed when applied to the valuation of truly innovative and highly uncertain projects. Traditional discounted cash flow (DCF) analysis relies on projections of long-term cash flows that are notoriously unreliable when uncertainty is high. The result is false negatives through which many promising projects are rejected because the NPV is negative. In this session, we present an alternative method for planning, valuing and executing highly uncertain projects in a rigorous yet intuitive manner. It is based on learning that is incorporated into the project in the form of progressive learning events, or Checkpoints.
We will describe the methodology, known as Discovery Driven Planning/Opportunity Engineering and use a case study to show how decisions can be enhanced using the methodology and tools.