Please write a case study on the financial considerations when deciding whether to hire contractors or hire an in house team for work. The scenario of this paper should discuss a government agency that currently has a contracting team of 10 individuals, but is considering whether to renew the contract or hire an in house team directly. This case study should be based on the company at the following internet address: http://www. carsoninc. com. This paper should also use the attached document to discuss the hourly rates of contractors versus hiring an in house staff.
This case study should discuss the make or buy decision, but the financial costs and considerations should be the primary focus of the case study. I have attached the hourly charges for contractors, and a spreadsheet which details the work of the contractors Richard S. Carson & Associates, Inc. has been awarded a contract to provide IT security program support services for the National Institute of health (NIH) Center for Information Technology (CIT). The objective of this contract is to develop, implement, and maintain the CIT Information Security program.
INTRODUCTION This case study is on the financial considerations for deciding whether to hire contractors or hire an in house team for a contract to provide IT security program support services for the National Institute of health (NIH) Center for Information Technology (CIT). The company to be awarded the contact is Richard S. Carson & Associates, Inc. THE OBJECTIVE The objective of the contract is enumerated as: developing, implementing, and maintaining the Center for Information Technology-Information Security program. THE SCOPE OF THE PROJECT
The scope of this project is to provide Information Technology security support services to support the Center for Information Technology-Information Security program Security Program including security program management support, system certification and accreditation (C&A) services, and security training and testing (e. g. , penetration testing, vulnerability assessments, contingency plan testing, disaster recovery plan testing, and application and General Support System (GSS) testing) for Center for Information Technology systems.
In any organization, financial consideration is the key factor, that determines whether the organization may be able to commence and be sustained i. e. the going concern in a given market environment. Decision making in any company is inevitable; from time to time managers are faced with business issues that demands for thorough scrutiny for a prudent decision to be arrived at. One of such resolution is the make or buy decision, to determine whether to utilize existing firms’ resources or outsource for services from the external environment respectively. The make or buy decision is both qualitative and quantitative in nature.
The qualitative considerations vary in many aspects and these include product quality and the necessity for long-run business relationships with contractors. On the other hand, quantitative factors basically involve cost, and this can be clearly shown in the Relevant Cost Approach. The decision to buy is usually arrived at by comparing the charges for outsourcing service which is purely marginal, with the marginal cost of hiring an in house team directly. When a service is provided for internally, the marginal costs will include labor, material, and production overhead.
In any make or buy decision, there are factors that should be considered. These will include: 1. CAPACITY OF THE FIRM In the event that the organization has excess capacity of human resource, it can adopt an in house team directly since there is an idle manpower that can be relatively used effectively. Some of the alternatives as far as capacity is concerned are: leaving facilities idle, outsourcing but renting the idle resources, and buying the parts and using unused facilities for other services (Hoffman, Rabbe, 2002).
2. THE FIXED COSTS The future cash outflow that does not vary with the decision forms part of the outlay cost, this is an irrelevant cost. Thus fixed costs must be clearly identified since they don’t affect the decision process. A good illustration is that whereby a proportion of fixed factory overhead, representing executive salaries, rent, depreciation, and taxes, continue regardless of the decision made as to buy or make the service. 3. DIRECT COSTS PER-UNIT
The key decision as to whether to make or buy is in the relevant costs; cost which will influence the decision and thus must relate to the objectives of the business and hence must differ with every possible decision to be made. For instance in a direct cost, subcontracting core tasks should be avoided at all cost, whereas invoices have minimum requirements (say, project name, description of tasks) and probably VAT should be excluded. 4. AVAILABILITY OF THE SERVICE TO BE PROVIDED. Should the contracting team be unreliable, then the firm may choose to adopt an in house resource.
However, the firm must have the necessary skills and equipment to initiate delivery of information technology and the ability to meet its own service standards before embracing such a decision. On the other hand, a company due to its long lifespan in a given market may have a wide range of highly qualified service providers such that the best decision is to contract from without. This could be coupled with the relationship between the firm and the contractors. 5. CONTRIBUTION TO BE MADE BY OUTSOURCING OF SERVICE.
It is more financially desirable to outsource for service if the cost to initiate a service is more than the cost to buy the same service from the external environment. It should be noted that a company that will use in house resources directly instead of outsourcing resources stand a risk of losing alternative sources, design flexibility, and access to technological innovations. In addition it is essential to focus on the service the firm can offer best, and consider outsourcing from other competent and efficient contractors services that poses a threat to the firm.
6. THE ORGANIZATION’S CORE VALUES, CULTURE AND COMPETENCY. The core values, culture and competence of an organization will determine the mode of operation of the government agency. For instance, one of the values of the government agency may be stated as: independence, creativity and self reliance. This may imply that the firm will always prefer to utilize its own resources and manpower to supply the services required rather than employing contractors from without the business. 7. CONFIDENTIAL INFORMATION
Organizations need to consider the risks involved in either decision made i. e. the chances of being disadvantaged by disclosing any confidential information to outsiders. It is deemed irresponsible to have confidence in other firms to undertake service delivery on behalf of the government agency. An approach that aids in concealing confidential information can be implemented, for instance, Protection of the firms’ brand with intellectual property by the development of proprietary formulations that are unpredictable. 8. THE IMPACT ON QUALITY OR DELIVERY.
Unless proper strategy and supervision is put in place, the quality and delivery of service may be compromised thus tainting the product brand and the image of the company. Otherwise, high quality and prompt delivery of contractors tends to encourage firms to go for outsourcing services, 9. REVERSIBILITY AND FLEXIBILITY OF THE DECISION MADE. The decisions made by the managers of any firm binds the operation of the business, hence there should be a favorable provision allowing for flexible move should the government agency’ management thinks otherwise; such include; termination for government convenience and termination cause.
Therefore, when entering into a contract with the contractors, the terms of the contract must be clearly defined and agreed by both parties without any misstatement. 10. THE PER-UNIT LANDED COST FROM A SUPPLIER At some point, the contractor has to import or rather transport the service (human resource) and thus shipment and transport costs must be included when determining whether to hire contractors or employ an in-house expertise. ILLUSTRATION CTB = C * LC and CTM = FC + (PUDC * V) Where, CTB = Cost to Buy, C= Capacity, LC = Supplier’s Per Unit Landed Cost
CTM = Cost to Make, FC = Fixed Costs (of making), PUDC = Per Unit Direct Cost (of making) THE TRANSACTION COST The boundaries of the organization depend majorly on the costs of transacting business. The decision to systematize transactions within the firm as unlike the “make or buy decision” depends on the relative costs of internal versus external exchange (Bateman, T. (2005). The market mechanism comprises a variety of costs; this includes: discovering the relevant prices, negotiating contracts and enforcing contracts.
In order to limit these transaction costs, a firm may adopt an in-house system of operation such that it can be able to coordinate and control the activities at a more close and personal level. However, it should be noted that in-house organization will erupt other transaction costs such as; problems of information flow, incentives challenges, difficulty in monitoring, and technicality in performance evaluation. Rational business decisions ought to compare the costs and benefits of developing a service against purchasing it, thus cost benefit analysis is paramount.
AGENCY COST The contract may involve an agent giving rise to agency cost. It should be clear when the contract is made whether such an arrangement will be incorporated. For instance, security requirements, insurance needs may form part of the contractual agreement, and so agency cost must be incurred. ECONOMIC COST This is also known as opportunity cost. In this case, economic cost is the cost that the firm will be deprived by deciding to either hire a contractor or employ an in house team directly.
Opportunity cost rate must reflect the discrepancy in the expected cash flows for any decision taken (Arthur, K, 2005). HOURLY RATES OF CONTRACTORS VERSUS HIRING AN IN HOUSE STAFF The prices reflect the net cost for management, organization and business improvement services in the consultation service department. There are several labor categories. This includes; Principal consultant, Executive consultant, Senior consultant, Consultant, Team leader , Production assistant, Word processing, Graphics illustrator, with hourly rates of $159. 85, $137. 17, $106. 10, $83. 80, $ 66. 75, $ 51. 52, $ 28. 28, $52. 82 respectively on the consultation services.
The same charges are on the facilitation services under each labor category except for Word processing and Graphics illustrator which are not provided. In the event that the total of these costs exceed the cost of an in house staff, then the firm should avoid contracting. As the firm thinks of contracting, it should note that it operates within the order amount, given that there is a maximum and minimum order of $1,000,000 and $300 in that order.
Usually, there are several tasks to be done, of which each takes a specified time, before the contract agreed upon is complete and ready for delivery. These includes : inception of the project, sending notification to customers, sending document request form, identifying system security categorization, system assessment, system testing, and contingency plan, packaging, review of the task done among others (Sorach, 2006). Timing is therefore an important aspect to be considered when the firm anticipates to hire contractors, so that the services are provided for when due and in the right quality, not affected by time lapse.
The nature of the delivery ought to be specified, whether expedient, overnight or delivered on demand thus the delivery schedule is essential. Sources www. carsoninc. com Sorach (2006). Design of business organizations. NY: Oxford. Arthur, K. (2005). Management principles. Cambridge: Cambridge university press. Bateman, T. (2005). Management: Leading & Collaborating. NY: McGraw-Hill Hoffman, Rabbe. (2002). Corporations and partnerships. London: South western college