Journal of Management Information Systems

Volume 25 Number 1 2008 pp. 17-48

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

Kauffman, Robert J and Sougstad, Ryan

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 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.

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