Optimal information technology service pricing and capacity decision under service-level agreement: A parametric analysis

Abstract

Service-level agreements (SLA) are essential for IT service management due to the complexity of IT service delivery model and the importance of ensured Quality of Service (QoS) for corporate clients. This study proposes a novel geometric framework for analyzing the optimal pricing and capacity planning for IT service provider under SLA. The IT service with congestion costs is modeled using an M/M/c queueing model. Using analytical modeling approach, our preliminary analysis shows that the optimal pricing and capacity depend critically on the functional form of the SLA contract. Moreover, the comparative statics shows how the optimal prices are affected in response to the changes in parameters defined in SLA. Our study contributes to the theoretical understanding of IT service management by introducing an innovative approach to visualize the revenue-SLA trade-offs. This study also helps service providers and business clients enhance their understanding about price/penalty scheme during contract negotiation or service-level management. © (2013) by the AIS/ICIS Administrative Office. All rights reserved.