Decision Making in Business: Recommendations for Onetech

Introduction: Onetech's Transition Challenge

Onetech is a publicly funded organization specializing in the provision of development services for staff employed in the Information Technology sector. The organization is currently considering a transition from its current publicly funded model to a self-funding one. The principle of this new business model is that client firms would pay an annual membership fee, based on which they would continue to benefit from the services provided by Onetech.

The dilemma raised at this level concerns the nature of the services still to be provided, the downsizing processes that would be required, and the appropriate size of the membership fee. Three service-model alternatives have been put forward for consideration:

• The maintenance of the same services and the request for a £6,000 membership fee per year;
• The reduction of services provided and the request for a membership fee of £4,000 per annum; and
• The provision of specific services as required by customers, with charges based on the services provided.

Aside from the services component, the organization must also decide on the effective means of implementing the change process and the budgetary implications of such an action. Three options have been devised in this sense and are presented and analyzed below.

Option 1 — Moving to a more cost-effective facility:

• Costs associated with the move: £10,000
• Organizational savings per year: £100,000 in rent (current rent of £120,000 minus new rent of £20,000)
• No downsizing
• Additional costs with marketing, research, and other expenses: £150,000
• Investment would be recuperated through sponsorship; revenue structure as follows: £900,000 (optimistic, 30% probability), £600,000 (medium, 60% probability), £300,000 (pessimistic, 10% probability)

Option 2 — Moving to an even smaller premise:

• Costs associated with the move: £10,000
• Savings from rent: £120,000 − £10,000 = £110,000
• Staff costs: reduced by £60,000 initially, with a prospect of reduction by half
• Additional costs with marketing, research, and other expenses: £100,000
• Revenue structure: £600,000 (optimistic, 30% probability), £400,000 (medium, 60% probability), £200,000 (pessimistic, 10% probability)

Option 3 — Massive downsizing:

• 30% of current staff would be retained
• Initial outlay of £100,000
• Additional costs with marketing, research, and other expenses: £200,000, which can be covered through sponsorships
• Revenue structure: £720,000 (optimistic, 30% probability), £360,000 (medium, 60% probability), £140,000 (pessimistic, 10% probability)

In order for the analysis to be conclusive, it must be conducted in two directions. The first is to assess the three alternative options on their own merits; the second is to assess the revenue structures for the most desirable alternative. The analysis of the three alternatives is conducted using a systematic model of pros and cons for each option.

Evaluating the Three Restructuring Options

Option 1 — Moving to a more cost-effective facility:

Pros:

• Maintains the same staff structure and therefore does not negatively impact employee morale
• Reduces costs by moving to a more cost-effective location

Cons:

• Loss of a central, easily accessible location
• Potential disruption to client relationships due to the change in location, as the new premises may be harder for customers to find

Option 2 — Moving to an even smaller premise:

Pros:

• Additional savings on both rent and staffing through the elimination of redundancies
• Emphasis on operational efficiency through the elimination of redundancies (Cologon and Cohen, 2008)
• Lowest marketing, research, and adjacent expenditure costs of all three alternatives

Cons:

• The premises would be even smaller than those in Option 1
• Implies downsizing of staff, which negatively impacts employee morale and may lead stakeholders such as business partners or customers to perceive Onetech as less stable and therefore less trustworthy (Jacobs, 2000)
• Increased marketing and adjacent costs relative to a simpler relocation

Option 3 — Massive downsizing:

Pros:

• Ability to rebuild the organization in terms of personnel needs
• Strong focus on operational efficiency
• Significant savings from the elimination of redundancies

Cons:

• Loss of credibility
• Loss of human and intellectual capital
• Loss of capabilities and the ability to deliver services
• Damage to organizational reputation in the eyes of various stakeholder groups, including business partners, customers, current and potential employees, and the general public (Hage, 2007)

The costs associated with Options 2 and 3 are more than Onetech can reasonably bear, and the advantages of Option 1 are necessary to ensure a successful transition. It is therefore recommended that the firm focus on moving to a more cost-effective facility, preserving its staff and their intellectual capital, and striving to consolidate its position.

Based on this analysis, it is clear that the best alternative for Onetech is to preserve its current staff structure and relocate to a more cost-effective premises. With that decision made, the analysis proceeds to examine the revenue structure to be implemented throughout the change process.

Revenue Structure and Membership Fee Analysis

The table below analyses the three revenue scenarios through the lenses of optimism, pessimism, and regret.

The revenue structure of £600,000 appears the most pertinent, representing a medium value between the optimistic and pessimistic scenarios. The principal difficulty with the optimistic revenue target of £900,000 is the challenge of attracting a sufficient number of customers.

Under a fixed membership fee of £6,000 per year, the required customer numbers are as follows:

• £900,000 ÷ £6,000 = 150 customers to achieve the £900,000 target
• £600,000 ÷ £6,000 = 100 customers to achieve the £600,000 target
• £300,000 ÷ £6,000 = 50 customers to achieve the £300,000 target

Under a fixed membership fee of £4,000 per year, the required customer numbers are as follows:

• £900,000 ÷ £4,000 = 225 customers to achieve the £900,000 target
• £600,000 ÷ £4,000 = 150 customers to achieve the £600,000 target
• £300,000 ÷ £4,000 = 75 customers to achieve the £300,000 target

All of these alternatives are difficult to assess with precision, given the variables of uncertainty, the organization's relatively limited commercial experience, and changing economic conditions. Nevertheless, in the context assessed here, it is recommended that the company adopt a medium revenue target of £600,000 by charging an annual membership fee of £4,000.

Such a strategy would require Onetech to attract 150 customers, which is a relatively high number. However, this objective could be achieved through marketing efficiencies (Wreden, 2007) and by emphasizing the lower membership fee. A lower price point helps customers make purchasing decisions in favor of the services offered by Onetech (Tybout and Calder, 2010).

Financial Projections and Recommended Strategy

From a financial standpoint, the recommended strategy is expected to generate a profit of approximately £310,000, estimated as follows:

• Sales = (0.3 × £900,000) + (0.6 × £600,000) + (0.1 × £300,000) = £270,000 + £360,000 + £30,000 = £660,000
• Direct service costs = £300,000
• Indirect costs = £50,000
• Profit = £660,000 − £300,000 − £50,000 = £310,000

This strategy of relocating to a cost-effective facility, retaining staff, and pursuing medium revenue targets would serve as a temporary solution enabling the firm to complete its transition from publicly funded to self-funded. The transition period is expected to last no more than two years. Once the transition is complete, Onetech would reassess its position and make new decisions based on the context and situations that arise during the transition.

While further strategic review will be necessary, it is currently recommended that the firm ultimately move toward a pricing structure based on the particular services offered to each individual client. Throughout the transition period, Onetech would build efficiencies and consolidate its position. In the longer term, it is recommended that the company pursue a strategy of diversification, as this would better satisfy customer needs, attract new clients, and thereby generate greater market power for the firm (Markides, 2007).

Conclusion

Overall, the decision-making process at Onetech is unstructured and evolves reactively as problems emerge. The advantage of this approach is flexibility, but it also generates significant challenges. The organization would benefit from a more systematic application of the rational decision-making model, greater integration of employee input, and more rigorous evaluation of alternatives before major decisions are made. Addressing these weaknesses will be critical to the success of Onetech's transition to a self-funded model and its long-term strategic development.

References

Cologon, D.R., Cohen, D.R., 2008, FileMaker Pro 9 Bible, John Wiley and Sons.

Hage, M., 2007, A Stakeholder Concern: Towards an Economic Theory on Stakeholder Governance, Uitgeverij Van Gorcum.

Jacobs, P.K., 2000, Minding the Muse: The Impact of Downsizing on Corporate Creativity, Harvard Business School, last accessed November 30, 2011.

Markides, C.C., 2007, Diversification, Refocusing and Economic Performance, MIT Press.

Tybout, A.M., Calder, B.J., 2010, Kellogg on Marketing, 2nd edition, John Wiley and Sons.

Wreden, N., 2007, Profit Brand: How to Increase the Profitability, Accountability and Sustainability of Brands, Kogan Page Publishers.

The Happy Manager, 2011, Rational Decision Making Model, last accessed November 30, 2011.

Tools for Decision Analysis: Analysis of Risky Decisions, University of Baltimore, last accessed November 30, 2011.