Towards the Consideration of Performance Risks for the Design of Service Offers

This work analyzes an outsourcing provider’s challenge to design optimal service offers in a setting in which future service performance is uncertain and the provider is penalized or rewarded for deviating negatively or positively from performance guarantees. In particular, we address the question how outsourcing providers with different risk attitudes should mitigate service performance risks by incorporating uncertainty premiums into service prices. The problem is studied in the light of service incident related penalty and reward functions that tie payments to the adverse financial impact a service customer incurs from performance degradations.