Creating financial risk management framework for the service delivery of long-term service agreements

Long-term service agreements (LTSAs) spanning over 5-20 years offer a functional guarantee of the output of products, which are extremely sophisticated and need elaborated and extensive service infrastructure, over the entire contract period. Bound by the contract, the provider is responsible for maintaining the product for its customer by developing an efficient service operations strategy. Risks are very important for the provider. Some risks can be eliminated by adopting a carefully created service operations strategy. However, some risks, e.g., financial risks, cannot be totally eliminated by the service operations strategy alone. This paper develops a rigorous financial risk assessment and management framework allowing the provider to evaluate its current service operations and to create an appropriate hedging strategy based on the delivery strategy.