Risk/Cost Valuation of Fixed Price IT Outsourcingin a Portfolio Context

By optimizing its outsourcing strategy, a company faces the opportunity to lower the overall costsof its IT project portfolio. Without considering risk and diversification effects appropriately,companies make wrong decisions about how much of a project is reasonable to outsource. In thispaper, we elaborate a model to identify a project’s optimal degree of outsourcing at a fixed price,considering both, costs and risks of software development, as well as diversification effects. Wealso examine optimal outsourcing degrees in an IT portfolio context. To date, it is commonpractice to decide on the implementation of projects first and then decide on outsourcing. Weprovide a model that enables companies to determine an optimal outsourcing strategy whichminimizes the total risk adjusted costs of an IT project portfolio by considering the portfoliodecision and the selection of outsourcing degrees simultaneously. This model is then evaluated bysimulation using real-world data...