Real options analysis for law departments (Dec. 20, 2005)

An article (Cal. Mgt. Rev., Vol. 48, Fall 2005 at 92) discusses extensively Shell’s use of scenario planning (See my posts of May 15, 2005 on Monte Carlo simulations and Dec. 9, 2005 on scenario planning.). The piece includes a lengthy discussion of “real options analysis,” an approach that “emphasizes that many investments create important follow-on opportunities.” Using the two tools together strengthens one’s farsightedness.

Real options is a way of thinking that might help some general counsel formulate their strategic courses (But see my post of Dec. 15, 2005, on whether strategic planning is truly possible for law departments.)

Pondering decisions– to build a practice area, to alter the mix of outside counsel, to invest in knowledge management – a law department’s leaders can use the real options approach to focus on the potential value embedded in being able to make different decisions downstream, once uncertainties are resolved far enough. Net present value calculations fall apart where uncertainties loom large; options consciously build in unknowns.