Value-at-Risk in Services-Oriented Systems and Technology Investments: A Framework for Managing Project Portfolio Uncertainties

• Main Authors: KAUFFMAN, Robert J., Sougstad, Ryan
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2008
• Subjects: Covariance; Financial economics; Financial evaluation; IT services; IT value; Portfolio management; Risk-adjusted return; Services sciences; VaR; Value-at-risk; Variance; Information technology; Portfolio uncertainty; Information systems; Decision making; Computer Sciences; Management Information Systems
• Online Access: https://ink.library.smu.edu.sg/sis_research/2756; https://doi.org/10.1504/IJSSci.2008.021764
• Institution: Singapore Management University

We present a method for analysing a vendor's exposure to uncertainties in IT services. These uncertainties arise in project portfolios with projects whose value covaries with managerial decisions about firm strategy, technology standards and platforms to be used. Past research involving information systems (IS) decision-making under uncertainty has focused on real options methods which inform a priori investment decisions. We explore methodologies associated with asset valuation theory in financial economics called value-at-risk (VaR), which measures the worst expected loss over a time horizon under normal market conditions at a given confidence interval. We show that VaR analysis informs management on how to leverage existing capabilities and risk exposures to inform the IT sourcing decision and ongoing IT services risk management. We explore information requirements, outcomes and limitations for VaR. We also present an evaluative framework to help a senior manager to bring these concepts into use in a real-world organisation.