ABSTRACT: 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 ser-vice-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 manag-ers can reduce organizational risk by forgoing profit-maximizing contracts in lieu of more conservative service-level agreements, yet still achieve high returns. Our approach pro-vides 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.
Key words and phrases: efficient frontier , financial economics , IT contracts , IT services , managerial decision making , mechanism design , portfolio management , profit-at-risk , services science , value-at-risk