Determining the Business Value of Volume Flexibility for Service Providers - a Real options Approach

Service Providers often struggle with fluctuating demand of service requests which can lead to prolonged waiting times and hence to dissatisfaction of customers. Therefore, service providers strive for volume flexibility to cope with this challenge. In manufacturing context, a shift of excess demand to an external partner is already common practice while service providers reacted reluctantly to this possibilities in fear of high integration costs. The uprising of new technologies such as Service Oriented Architectures (SOA) lowered these cost and allowed the separation of up to now entangled software functionalities into services and the use of standardized interfaces. Nevertheless, investment decisions related to SOA oftentimes lack a well-founded valuation of the respective benefits. Therefore, we present an analytical model based on the Real Options Approach (ROA) that determines the business value of flexibility resulting from an IS-based integration of an external service vendor. Thereby we consider the trade-off between the investments into the technical requirements (e.g. SOA) that are necessary to gain volume flexibility on the one hand and the negative effects of unsatisfied customers on the customer equity on the other hand. We also provide first insights into the applicability of the model via a demonstration example.