A pooled computer center as a risk management tool

Abstract

Firms utilizing large computer centers must also cope with disaster and recovery from the shut down and sudden interruption of computer services. A possible strategy which has gained popularity in recent years is based on a mutual pooling arrangement for sharing a back-up computer center. Such a center may be owned, for example, by a company selling its services for a fee to members of the pool. We interpret this fee as an insurance problem with the fee equalling the premium and related to the computing capacity bought by each of the participants in the pool. Currently, such arrangements by companies need about 40 customers per site to break even. This paper enables the calculation of the probability of failure of such a mutual arrangement, which depends on the size of the emergency center, the number of members and the probability of each of the pool members being unable to perform a service in its computing center. In addition, an expected utility approach is used to determine the “premium” each member of the pool is required to pay for the services of such a center. The size of the pool—resulting from the trade-off between the probability of failure and the cost per participant is also calculated. The use of several sites, operating independently of each other, is not considered in this paper.