The recruiting company called “Initiative”. Founded in 1991, it is a medium sized firm, which employs 15 people. The company is situated in Green Bay, WI. The main services that “Initiative” offers are:
Searching for potential candidates to fill clients’ vacancies;
Holding preliminary interviews with candidates;
Developing HR strategy for the client (primarily for small firms or start-up enterprises with no experience);
Organizing teambuilding seminars for clients.
The main customers of “Initiative” are medium-size companies, which are actively developing. However, there are also several clients who represent solid well-known companies. “Initiative’s” business credo is “Experience and devotion to make you feel the difference”.
Considering that the company operates in the large segment (customers are small and medium-sized firms, which are multiple in the city), the competition is very intense. Therefore, in order to survive and ensure competitive advantage, “Initiative” offers additional complimentary services such as strategic HR planning and teambuilding seminars for its clients. Moreover, there is a discount scheme for any company that worked with “Initiative” at least once.
The organizational structure of the company has a matrix form. There are two general managers, 7 consultants, 4 researchers who are grouped in a team depending on the project. There are also Accountant and Assistant Accountant who work separately serving all the projects without exception.
“Initiative” is a recruiting company, which means that its core competence is to provide services – fitting clients’ needs for certain type specialists. For services companies it appears to be quite difficult to determine the break-even point, since it is hard to classify the costs and attribute them to specific revenues. However, it is important to chose an activity of the company and try to analyze it in order to find a break-even point.
For “Initiative” such activity will be finding one candidate (say, financial analyst) for the customer to fit the position. The time period of search is limited to one month. The main inputs into the activity are:
Time ( days);
The number of people working on the project (The more people working, the more costly it is for the company);
Utilities and conveniences, mainly Internet and phone connection.
In this case, fixed costs for the company are salaries of employees working on the project. Variable costs are the costs of utilities and different supplementary materials (paper, pens etc.) The revenue is the amount of money (in $) “Initiative” gets for the appropriate financial analyst the client accepts. The unit of measurement is $/day (costs/days of work on the project): how costly is one day of working on the project or simply days. Obviously, the less time “Initiative’s” team spends on the project, less costly it would be in terms of variable costs.
The break-even point will be when Revenue= TC (Fixed+Variable costs), where
VC/day =95 , FC = 1800 Revenue — $3500. All figures attributes to one month period. Break-even point (days) = (Revenue – FC)/VC/day = 18 days It means that efficient for the company to complete the project is actually 18.
The result is customer satisfaction and eagerness to continue cooperation with “Initiative”. The main implication: since salaries (i.e. fixed costs) remain the same, the general managers have to organize team in such a way to spend the less time possible on the project to minimize variable costs and to reach the break-even point as quickly as possible.
The decision that has been recently made by the company has to do with the necessity to improve the technical level of the company, i.e. to implement the new IT systems, which will enable “Initiative” to save time on many operations and give access to different previously unavailable information.
Relevant costs associated with the decision are:
The price of the IT necessary. Nowadays to stay competitive, it is important to upgrade own level using various sources. IT is one of them. However, competitive advantage “costs” a lot. Therefore, the company will have to evaluate own resources in order to make final decision wether to buy IT application or not. Possible costs = $100000
Salaries that the company will have to pay for the specialist, which will serve the new IT application once it is purchased (installation, testing, monitoring etc.) Possible costs = $6000
Non-relevant costs associated with the decision:
While the new IT application will be launching, it is possible that the company will slow down its current projects (as a rule, it is needed from 2 weeks to 2 months to train personnel and get used to the innovation). Possible costs = $5000-10000 in unrealized projects
In case of delay with the projects (due to system launching), the current clients can be dissatisfied. Thus, “Initiative” risks to lose customers, which will reflect on the ultimate revenue of the company and can be even more costly in terms of money (both current and future) than IT purchase and launching. Might be very costly considering possible future orders that lost customer could make.
Thus, the main implication of the decision is that “Initiative” has to evaluate all the pros and cons of the IT launching in terms of money and strategic perspectives. It might be reasonable to postpone the innovation implementation until summer, which is considered to be a slow season in terms of recruiting.
Treatment of allocated costs
“Initiative” attributes its cost to specific project. The project means the cooperation with specific company no matter how many vacancies the latter needs to fill. For example, “Alfa Auditing Ltd.” project may include the need to fit 3 positions – accountant, receptionist, and IT specialist. This project is assigned to a team of 3 consultant and one researcher (total of four people). Total time period is one month.
The allocated costs of this project would appear as the following:
Salaries of those working on the team. It is important to notice that if the project takes, for instance, 15 days (half of the month), then we can assume that the second half of the month the team could work on another project and costs associated with their work would be divided by 2. Salaries = $12000 total
Utilities; It is reasonable to attribute utilities for the number of teams working simultaneously. If there are two teams working during this month, then the cost of utilities will be divided by 2. utilities = $500
Transportation (in case the meeting is held not at the “Initiative” but at another place); $200
Thus, the overall sum of allocated costs will be $12700. However, despite the allocated costs, we should also consider so-called unallocated costs or the costs that are not obvious. In “Alfa Auditing” project case the unallocated costs appear to be the following:
· Time spending on finding the customer. “Alfa” is a well-known company in the region. “Initiative” had to hold multiple meetings with “Alfa’s” Chief HR to sign a deal. The time spending on this equals to the time of medium-size project completion ($15000)
· Headhunting costs. In order to satisfy “Alfa” it is necessary to find a highly qualified professional for the position of Accountant, which is twice as time-consuming compared to less scale project (additional costs $1500)
Thus, we can see that overall costs appear to be twice as much as the costs reported. However, it is so-called accounting method of reporting costs. Yet, it is reasonable and absolutely necessary to consider benefits from satisfying such major client as “Alfa”. Those benefits might include:
Ø Large-scale and thus price-worthy projects in future;
Ø Continuing co-operation;
Ø Possible recommendations for others to use “Initiative’s” services.
Activity Based Costing
Since the services of “Initiative” are mainly fitting client’s need for the appropriate candidates, the ABC will be attributed to finding specific person to fit one position in some company. The stages of the activity are the following:
Making announcement and collecting resumes. Usually, it takes up to two weeks.
Making preliminary phone interviews. The main cost driver here is phone connection ($200-300 per month);
Holding personal interview. The main cost driver here is time spending for the interviews while selecting several needed people. As a rule, it takes 7 to 10 days. The costs at this stage are calculated as monthly salary of the consultant divided by days spending for interviews. The less day spent, the more efficient is the work of the consultant and thus less costly it is for the company, since the rest of the time after the project completion this employee can spend on another project and thus generate more revenues for the company.
Presenting selected candidates for the customer. The cost driver here is also the time the customer spends on the decision-making. For instance, if the customer accepts the first presented candidate, the time spent will be 1 day. If he accepts one of the following candidates, the overall time spend should be calculated as the sum of days between presenting the first one and accepting the final candidate. The costs associated with this activity should be calculated as revenue for the project multiplied by the days of selection. For instance, the total revenue is $10000. The time limit – 20 days (10000/20=$500 day). The time spent for selection is 3 days. Thus, the total cost will be $1500. However, it is important to notice that this kind of indicator is not used in the company’s balance sheet. It is solely the criterion to evaluate the overall effectiveness of the project.
In such a way, ABC of the company shows that the main cost drivers are days spending on the project. The more days are spent, the more costly it is for the company. Thus, the main implication again is that “Initiative” has to work on own efficiency. In order to achieve this goal, it is necessary to:
· Form the team in such a way to enable it to show the best performance possible. For instance, if the project is huge, it is reasonable to assign two instead of one researcher;
· To improve IT to speed up internal documentation processes;
· To improve the qualification of consultants (by training and seminars) in order to help them to reveal psychological and professional qualities of candidates quicker and thus spend less time on interviewing and ensure appropriate decision-making.