IT Service Disruptions and Provider Choice

Abstract

Digital supply chains are increasingly interconnected and vulnerable to disruption, causing service interruptions impacting many firms and their customers. Combating threats to the digital supply chain is the top challenge for leaders in most supply chain industries, demonstrated by the tacit approval of nation-states for cyber-attacks on corporate supply chains to disrupt downstream firms. Disruptions to digital supply chains are not new. In April 2019, hundreds of flights in the United States were delayed when a critical service provider, AeroData, had a computer systems failure. AeroData delivers flight planning services to many airlines including Southwest, United, American, and Delta. All flight operations for AeroData’s over 100 clients simultaneously ceased and thousands of customers were stranded at airports across the country. In an increasingly connected business environment, competitors may be simultaneously disrupted due to a common service provider, impacting all affected firms’ demand. The synchronization of disruptions for firms that use a common service provider has implications for service provider choice and investment. We use a two-stage game to model how a firm’s customer demand is impacted by disruptions at a service provider, and how this subsequently affects the firms’ choices in managing service provider risk. Considering downstream demand effects from upstream service disruptions, the contribution of this paper is the examination of how risk synchronization impacts provider choice decisions and profits. In addition, we illustrate how these choices impact upstream industry concentration.