Abstract
In this paper we present an economic model for analyzing enterprise IT service downtime cost, first on a standalone basis and then in a supply chain setting. With a baseline probability model of Poisson arrival frequency with random downtime duration, we analyze optimal production of a firm’s investments in reducing frequency and duration of downtime, and corresponding premiums for insuring against downtime cost. We also present a model for the spillover effect of downtime for interconnected firms in a supply chain, and discuss how third-party insurance coverage can help enterprises to internalize the externalities of spillover effects on the supply chain.
Highlights
An enterprise may face IT service downtime costs, due to a variety of causes including antagonistic IT attacks by hackers, non-antagonistic IT service outages, or natural catastrophes such as floods or solar storms
The results indicate overconfidence, and even though it is difficult to imagine that executives today maintain that their supply chains remain robust in the face of a week-long internet service outage, the relative overconfidence might still be similar
To facilitate later calculation of premium for insurance against downtime cost, we introduce a concept of deductible d, which is defined such that the downtime can be decomposed into two parts: T = min (T, d) + (T − d)+ where min(T, d) =
Summary
An enterprise may face IT service downtime costs, due to a variety of causes including antagonistic IT attacks by hackers, non-antagonistic IT service outages, or natural catastrophes such as floods or solar storms. The potential losses from downtime can be highly significant, with hourly costs of IT service outages ranging from hundreds of thousands to even millions of US dollars (Rapoza 2014; Ponemon 2016), at least for large companies in certain industries. These large downtime costs are not unique to our present time and had been around since 20 years ago (IBM Global Services 1998).
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