A Simulation Model for Risk Management Support in IT Outsourcing

Abstract

Abstract:IT Outsourcing (ITO) is the practice to delegate organizational IT functions to a third party. However, this practice introduces important risks for customer organizations. We have developed a system dynamics simulation model to support ITO decision making that considers a dynamic and integrated view of capabilities management and benefits management. Two IT capabilities are modelled: Contract Monitoring (on the customer's side) and Service Delivery (on the supplier's side). In this paper the proposed model is used to assess the risks presented by a deficit in these capabilities. The results of our experiments indicate that the lack of contract monitoring capability in ITO contracting organizations directly impacts on service conclusion time and influences the cost of contract management, which is an important risk factor related to exceeding the ITO budget. It was also found that low levels of service delivery capability in the supplier most significantly impact the cost of rework and the number of penalties. These factors influence the profitability of the supplier and may induce it to abandon the contract prematurely.