Real Options in Military System Acquisition: The Case Study of Technology Development for the Javelin Anti-Tank Weapon System

Abstract

Three different technologies were considered in the technology development phase of the Javelin anti-tank missile system: a laser-beam riding system, a fiber-optic system, and a forward looking infrared system. The Army awarded three Proof of Principle� contracts to three competing contractor teams to develop and conduct a fly-off technology competition. The current work analyzed the three alternatives using measures of effectiveness (MOE) to combine performance across nine acquisition objectives. These MOEs were compared with development and procurement cost estimates. No alternative dominated. Marginal benefits analysis was next used to define the trade-off space among the alternatives. Differences in the likelihood of successful development of the alternatives were evaluated, resulting in one technology appearing to dominate. However, the acquisition approach created a real option for the best alternative that could differentially add value to the alternatives. A real options model was used to analyze the value provided by investing in this competitive option. Results indicate the Army paid less than the total value of the three options, but could have increased net savings by paying different amounts to test each alternative. The analysis method provides a logical and defendable approach to the analysis of alternatives during technology development uncertainty.