Business

What are the advantages to using internal over external staffing?

An important staffing decision facing an organization is whether to use internal staff or external staff (contractors or outsourced suppliers) to carry out functions. There are advantages and disadvantages to either course, and the most effective solution may be to use a mix of both.

Where there is a need for full-time employment of staff to fulfil a function, it may be more cost effective to employ a full-time staff member. As a general rule (depending on locally applicable terms and conditions), in the long term it is probably more cost effective to employ internal staff where there is a need for an ongoing full-time presence. This is because external contractors tend to have a higher per-hour cost than permanent staff to compensate for lack of tenure and contract overheads.

However, where the need for staff is intermittent it may be more cost effective to use external contracted staff. Use of external staff for purposes with a limited life span avoids the need to find other employment for those staff when the project ends, or the necessity for severance payments.

Another advantage to using external staff, particularly for highly skilled functions, is that external specialists are more likely to have the necessary expertise than in-house staff. However, external staff have an exposure to a wide range of clients and access to specialised training, may be more likely to be effective than internal staff not provided with the same opportunities.

Conversely, an advantage of using internal staff is that internal staff are more likely to have a thorough understanding of the organization's specialised systems than external consultants would have. This is especially so where an organization uses customised systems or processes that are not in general use elsewhere.

Where internal staff are used, organizations should take care that they do not come to rely on a small number of individual staff members who carry their knowledge around in their heads. This is a dangerous situation, as all staff members move on eventually, by choice, accident or design, and organizations should ensure that the departure of key individuals do not place the operation of their company at risk. To avoid this situation, key individuals should be required to document their knowledge so that others can perform their function in their absence.

As there are pros and cons to use of both internal and external staff, most organizations will employ a mix. Internal staff are best used on ongoing functions and to ensure that institutional memory persists. External staff are best used for short-term tasks such as implementation and training, but they are also useful for specialised tasks requiring technical qualifications or wide experience.

XYZ (a credit card company such as American Express) is looking for new and innovative ways to attract more customers and improve its current business process. As a manager briefly describe and provide some ideas that can help this company meet and exceed its competitors and survive in our current dynamic environment (some ideas may include a launch of an on-line site to help customers with their banking needs, or a massive marketing campaign to promote its name... but needs to be more descriptive)? In the summary, it should answer important questions like how and why it works?

This is a deceptively large problem, so the best strategy is figure out where XYZ wants to start. It is always a good idea to look at customers and business practices at the same time, with an appreciation for how one affects the other. The point about customers is that without them, business practices don't mean much. The point about business practices is that they must support profitability, be ethical, efficient, and easily understood by both employees and customers.

A lot of what XYZ can do in its business will depend on (staying within laws and regulations, of course) who it wants to attract as customers, what their competition is offering, and what the customer will pay. Don't forget to consider risk, as being in the credit business is all about risk. Different categories of customers carry different risk profiles.

So here is a process that will work for this assignment:

1. Decide what customers XYZ wishes to attract.
2. Knowing the type of customers, decide on a specific program that will meet their needs in managing their credit for day to day cash flow. Look at what other firms are doing in the same industry, and consider the pros and cons. Look at ideas that might work in other sectors. But also brainstorm creatively, thinking what can be done with technology, or other resources that can be combined for the customer. If you like consider a more conservative strategy, which only reduces costs on current customer operations. Look at what steps both employees and customers go through that could be made more efficient. Often something that is a pain for the customer is also an unnecessary cost for the firm, and an annoyance to the employee. Talking to both customers and employees is a good source of information on this tack.
3. Analyze the costs and risks of implementing the program for the customers. It will help to mention ideas for actually communicating and attracting the customer, but that really could be an entire separate assignment. So really concentrate on what is involved in actually delivering the process.
4. Project the return you would expect to get on the program. It is impossible to know for sure, but you still need the projections in some form, how many customers, how much sales per customer, the cost of delivering the program to the customer. Brainstorm as many assumptions as time allows.
5. Analyze any other factors, aside from cost, which might affect XYZ from implementing the program.
6. Make a strong recommendation to your board about going ahead with the project.Now that you have a template, relax, let the juices flow, surf the net looking at what credit card companies do. Come up with your new program idea and follow the template, and have fun with it.

What are the merits of issuing bonds, preferred stock and common stock with to flexibility, control, cash flow and risk from the viewpoint of the company?

1. Here are some characteristics about each type of instrument, the list is by no means exhaustive, but you may refer to your text for additional features:

   Bonds: There are many varieties of bonds, or external debt instruments to choose from, eg callable, convertible. Depending on the type of bond, various rights of control may be assigned to the creditor. Interest payments are expensed and therefore taken from pre-tax pretax income. Interest rates will vary depending on type of bond. Bond holders may exercise rights at a bad time, viability depends on ratings by agencies such as Moody's.

   Preferred Stock: Company may choose whether or not to pay dividend. Dividend is fixed, firm has discretion on paying dividend. Preferred stock, despite its name, is not as popular as common stock.

   Common Stock: Firm may buy back shares if it chooses, this often raises share price, but also allows them to be returned to the market at a higher price later, assuming the price rises. Common stockholders exercise control by electing board and voting on major issues. Must pay dividend on common stock if paying preferred stock dividend. Companies raise cash by issuing shares as need arises. Exposure to hostile takeovers, management may fall out of favor with shareholders.

2. Construct a table with three rows, one for bonds, one for preferred stock, and another for common stock.
3. Head up four columns, one for flexibility, one for control, one for cash flow, and one for risk.
4. Look at the above characteristics, and sort through them to complete the table. Think about specific situations that firms might be in and the type of debt structures they would pursue in those situations.
5. Look out Wall Street!