A decision analysis approach to financial risk management in strategic outsourcing contracts

Managing risks and the associated decisions surrounding them is an activity often undertaken by organizations within an enterprise on an ad hoc basis, using document templates or spreadsheets to track issues or concerns and associated actions. Such an approach, while worthwhile, does not provide a consistent foundation for data collection, analysis, or reporting to enable data-driven decision making. We describe a framework consisting of (1) data specification and collection, (2) predictive modeling, and (3) reporting for managing service provider risks associated with the execution of strategic outsourcing (SO) contracts and show how such a framework has been leveraged at IBM for managing financial risks associated with IBM’s SO business. In particular, we provide details on the construction of quantitative models for proactive risk management and discuss the decision process driven by the model results.