Title: Value-at-risk in service-oriented systems: a framework for managing a vendor's portfolio uncertainties

Authors: Robert J. Kauffman, Ryan Sougstad

Addresses: W. P. Carey School of Business, Center for Advancing Business through Information Technology, Arizona State University, Tempe, AZ 85287, USA. ' Carlson School of Management, University of Minnesota, Minneapolis, MN 55455, USA

Abstract: 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.

Keywords: 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.

DOI: 10.1504/IJSSCI.2008.021764

International Journal of Services Sciences, 2008 Vol.1 No.3/4, pp.225 - 246

Published online: 03 Dec 2008 *

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