Despite significant research progress on the problem of managing
systems development risk, we are yet to see this problem addressed
from an economic optimization perspective. Doing so entails answering
the question: What mitigations should be planned and deployed
throughout the life of a systems development project in order to
control risk and maximize project value? We introduce an integrative
economic optimization approach to solving this problem. The approach
is integrative since it bridges two complementary research streams:
one takes a traditional microlevel technical view on the software
development endeavor alone, another takes a macrolevel business view
on the entire life cycle of a systems project. Bridging these views
requires recognizing explicitly that value-based risk management
decisions pertaining to one level impact and can be impacted by
decisions pertaining to the other level. The economic optimization
orientation follows from reliance on real options theory in modeling
risk management decisions within a dynamic stochastic optimization
setting. Real options theory is well suited to formalizing the impacts
of risk as well as the asymmetric and contingent economic benefits of
mitigations, in a way that enables their optimal balancing. We also
illustrate how the approach is applied in practice to a small
realistic example.