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Please scroll down for article-it is on subsequent pagesWith 12,500 members from nearly 90 countries, INFORMS is the largest international association of operations research (O.R.) and analytics professionals and students. INFORMS provides unique networking and learning opportunities for individual professionals, and organizations of all types and sizes, to better understand and use O.R. and analytics tools and methods to transform strategic visions and achieve better outcomes. For more information on INFORMS, its publications, membership, or meetings visit http://www.informs.org

Organizations may view outsourcing as a way to manage risk. We developed a decision-analytic approach to determine which risks the buyer can share or shift to vendors and which ones it should bear. We found that allocating risks incorrectly could increase costs dramatically. Between 1995 and 1998, we used this approach to develop the request for proposals (RFP) for the US Department of Energy's (DOE's) privatization initiative for the Hanford tank waste remediation system (TWRS). In the model, we used an assessment protocol to predict how vendors would react to proposed risk allocations in terms of their actions and their pricing. We considered the impact of allocating each major risk to potential vendors, to the DOE, or to both and identified the risk allocation that would minimize the DOE's total cost—its direct payments to vendors plus the costs of any residual risks it accepted. Allocating inappropriate risks to the vendor would have increased costs because the vendor would add a large risk premium to its bids, while allocating inappropriate risks to the DOE also would have increased costs because the vendor would not take adequate risk-reduction measures. With the improved risk allocation, the RFPs resulted in bids that were acceptable to the DOE.

When creating a private market to provide a public good, government agencies can influence the market's competitive characteristics. Markets have predictable, often counter-intuitive, behaviors. Attempts to foster competition can increase or decrease costs, depending on the specific details of the procurement situation and the specific implementation. We modeled impacts of competition where there are economies of scale and government is obligated to purchase a fixed total quantity of a good. This model estimates cost savings from several alternative plans for a buyer exploring competitive procurement. The results indicate the approximate magnitude of changes in cost that would be associated with changes in the market structure within which such procurement occurs.

Combining the PMI information with other indices, such as the RMI and the CMI, allows analysts to perform a comprehensive assessment of risk that can support decision-making about protection, business continuity, and emergency management of critical infrastructure.