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Lean + Real Options = Reduced Complexity and Risk

by Deborah Hartmann Preuss on Jan 21, 2010 |

Chris Matts and Olav Maassen have been speaking about Real Options, a decision-making process based on Financial Option mathematics, in the Agile community since at least 2007. The idea isn't entirely new - Kent Beck wrote on Real Options in his 1999 "white book" (Extreme Progamming Explained). Now Matts and Maassen are specifically addressing the Lean cohort of the Agile community, with a post entitled Lean and Real Options, proposing that, based on their experience, application of Real Options improves Lean implementations. Others are equally inspired by what Real Options adds to the mix.

Being an investment banker, Matts realised that Agile was less risky than Waterfall due to the options embedded within it, but when he tried to value the options within an agile project using financial maths, he found it impossible. He did, however, uncover a simple model that allows him to exploit the embedded options better than before. The three rules in the real options model are: Options have value; Options expire; and Never commit early unless you know why.

With Real Options, Matts and Maassen advise us to push back decisions as far as possible and to gather information, create options and understand when they expire, so we can optimize decision making and minimise the risk of a decision being a bad one. Applying Real Options to Lean Software, the authors propose the following three enhancements to Lean;

  • Lean's axiom: “Defer commitments to the last responsible momentis replaced by Real Options' “Never commit early unless you know why,"  which directs us to find information so we can make commitments early, reducing risk and complexity.
     
  • Lean advocates to defer until "the last responsible moment" without offering much help on knowing when that is. In Real Options, the conditions are specified, at which the commitment should be made, reducing uncertainty. 
  • Having applied Lean principles to software development, the authors experienced that these principles apply to software development differently than to manufacturing. Their example: a customer is said to "pull" a car from Toyota (a central Lean concept), but the customer "pushes" features into software development. Their third improvement is achieved through Feature Injection, an Agile Analysis technique based on Real Options and Kolb’s model of learning, which determine the minimum set of features necessary to deliver specified value, reducing complexity.

Lean Software Development thought leader David Anderson previously questioned the application of Real Options in software development, saying "The reality is that as an industry and profession, we are years away from having the maturity to correctly measure and assess these data" [required to calculate Real Options]. However, a year later he was quoted as saying "Real Options change everything" and the concept inspired his own thinking on Prioritizing and Planning for Market Risk. He has now apparently embraced this approach: the abstract for his talk at InfoQ's QconSF2009 says "Lean pull systems and Real Options Theory provide new means to manage overall business risk in technology projects."

Others are picking up the theme:  Pascal Van Cauwenberghe (co-creator of the XP Game) has created The Real Options Space Game, with full instructions for using it on the AgileCoach.net site.

Momentum is picking up for this topic, as the community starts to explore the relationships between Agile, Lean, Kanban Real Options, Feature Injection and BDD and the potential they represent in various combinations.

For those interested in following this topic, Olav Maassen has set up a mailing list for ongoing discussions on Real Options.

 

Read more on InfoQ about Real Options and Feature Injection.

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