Risk Management of IT Services Portfolios: The Profit-at-Risk Approach.

• Main Authors: KAUFFMAN, Robert John, Sougstad, R.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2008
• Subjects: efficient frontier; financial economics; IT contracts; IT services; managerial decision making; mechanism design; portfolio management; profit-at-risk; service science; value-at-risk; Computer Sciences; Management Information Systems
• Online Access: https://ink.library.smu.edu.sg/sis_research/2760
• Institution: Singapore Management University

Information technology (IT) services providers are exposed to exogenous risks faced by the industry as a whole, and endogenous risks from their current portfolio of IT contracts. This exposure may lead to cost overruns or legal responsibility for service-level breeches. Providers can leverage information about their risk positions implied by their IT services contract portfolios to gain strategic advantage over their competitors. We build theory in support of a new construct, profit-at-risk, for evaluating the trade-offs between contract profitability and service-level risk, stemming from financial economics theory and models. We simulate an IT services contract portfolio, and show how managers can reduce organizational risk by forgoing profit-maximizing contracts in lieu of more conservative service-level agreements, yet still achieve high returns. Our approach provides decision support for ex ante contract evaluation and negotiation, and a means to conduct ex post efficiency evaluation. It also aligns IT service management with best practices in financial management.