IT Consulting Ethics – Part 3 – Benefit-Cost Analysis and Government Considerations

If the principal objective of a not-for-profit organization is to maximize some aspect of its non-pecuniary mission, the marginal comparison criteria applied in the for-profit sector to revenues and costs should be equally applicable in the not-for-profit sector to the quantifiable    characteristics of the mission being pursued. “Benefit-cost” analysis may provide decision criteria for the organization manager in the government and not-for-profit sectors. The sum of all benefits (non-pecuniary as well as revenue) resulting from mission pursuit constitutes the numerator, B, of the benefit-cost ratio. Its denominator, C, consists of the sum of all costs (non-pecuniary as well as pecuniary) incurred in pursuing the mission. If the value of the ratio is a number greater than unity (i.e., B/C > 1), then the activity under analysis is justifiable; any benefit-cost ratio less than unity (i.e., B/C < 1) suggests that the activity is unwarranted.

Simple benefit-cost analysis has been extended to the concept of marginal benefit-cost analysis. This version is applicable to situations where the question is whether to do more or less of the activity which is already in progress. The numerator of the marginal benefit-cost ratio includes only the additional benefits which are expected to flow from some increment of the activity; the denominator sums only the increased costs incurred by the activity increment. The same decision criterion holds for the marginal as for the simple benefit-cost ratio: a value greater than unity warrants the activity increment while a value less than unity indicates that the activity increment should not be undertaken. While marginal benefit-cost analysis has been used most often as a decision criterion in the not-for-profit sector, it is apparent that the for-profit criteria of marginal revenue and marginal costs are special cases of marginal benefits and costs where the benefits and costs are pecuniary values (or equivalents).

Both simple and marginal benefit-cost analyses are subject to bias and fraught with the potential for abuse. The bias follows from the requirement to include all benefits (psychic and other non-pecuniary benefits as well as any revenues resulting from the activity) and all relevant costs (non-pecuniary psychic and opportunity costs as well as explicit money costs). The problem is that a decision maker who is has a predisposition favoring a proposed activity tends to exhaustively identify all possible benefits and also tends to overestimate their money value equivalents. A decision maker with such a predisposition also tends to be more casual about identifying the relevant costs, and may also be inclined to underestimate their money value equivalents. By the same token, a decision maker with a predisposition against an activity tends to do the opposite, i.e., to casually overlook some benefits and underestimate the values of those identified, while exhaustively finding all relevant costs and carefully estimating their full money-value equivalents. Because of the subjectivity involved, it is entirely possible for two decision makers, confronted by precisely the same prospects and with the same information, to estimate widely divergent benefit-cost ratios and reach opposite decisions about whether to proceed with the activity.

Because capitalism (or market economy) is the form of economic organization to which the world seems to be drawn, I shall presume its general characteristics in subsequent discussion of the role of government. Given this presumption, there are six principal points of contact between firms and the government.

(1) Along with other entities in the economy, the government is a demander of goods and services from private-sector business firms; i.e., firms function as suppliers to the government. Since the government is likely to be the single largest economic entity in any economy, the prospect of supplying the government should provide market opportunities for a great many firms in the economy. However, firms seeking to function as suppliers to government should be aware of becoming too highly dependent upon government orders.

(2) Firms pay taxes to the government. The taxes may be related to the firms’ profits, their sales, their inventories or other assets, or the wages which they pay to their employees. Tax-related record keeping and reporting often become burdensome to business firms, and tax liabilities and rates are subject to change at the dictatorial or parliamentary whims of the state.

(3) Depending upon the government’s particular political, social, and military programs, various firms in the economy may become objects of support by the government. Such support may take the forms of subsidies, approval of licenses, preferential contracts, or other encouragements. The government may attempt to structure such activity as a coherent industrial policy for the promotion of international competitiveness of domestic companies.

(4) In pursuit of its agenda, government’s interests in firms may extend beyond support to efforts to control the activities of firms. Objects of governmental controls may include directions of research and development efforts, determination of product mixes and item specifications, selection of capital investment alternatives, eligibilities for import or export licenses, and employment practices. These activities may become elements in a more comprehensive industrial policy.

(5) The private sector may become an object of regulation by the government in the interest of employees, consumers, or other interests in the economy. Such regulation almost always imposes additional costs upon business firms, and consequently squeezes profits or results in higher market prices.

(6) And finally, the private sector may become the object of efforts either to promote and encourage competition, or to stifle or prevent competition. In the former case, “antitrust” or “antimonopolies” laws may be enacted and enforced; in the latter case the government may become the prime mover in the effort to “rationalize” or cartellize industry (also a possible component of industrial policy).

In their extreme manifestations, points (1) and (4) above may devolve to the characteristics of fascism. I may also note that the government can effect a ready transformation to the characteristics of socialism simply by nationalizing private-sector firms so that they become government-owned and directed enterprises. Our purpose in making these observations and otherwise identifying the various points of contact between firms and the government is to note that the operation of government in a capitalistic economy may pose threats to private sector firms as well as provide opportunities which they may attempt to exploit.

The most fundamental role for government to play in the market economy is the maintenance of an environment which is hospitable to the functioning of market economy and the exercise of entrepreneurship. At very minimum this means establishing the rules for holding, transferring, and arbitrating disputes over the possession of private property, determining weights and measures, providing a stable money supply, insuring the sanctity of contracts, and otherwise maintaining law and order. John Stuart Mill during the nineteenth century referred to these minimal roles for government as the “night-watchman” functions.

Beyond the night-watchman functions are four other significant rationales for governmental involvement in the market economy: to maintain competition, to reallocate resources, to redistribute incomes, and to stabilize the economy. Each of these rationales is founded upon some fault, shortcoming, or failure in the functioning of the market.

From this perspective it may be noted that any problem in the functioning of a market may invite some response from government to address the perceived problem. And if market mechanisms exhibit traumatic failure or become fundamentally distrusted by the political leadership of the society, these constitute the rationales for shifting to fascism by conferring product-mix decision making upon a central authority, or to socialism by nationalizing privately-owned productive resources and imposing central planning and direction. By the same token, failure of authoritarian socialism constitutes the rationale for shifting from authoritarian control to some form of market economy. It appears that this latter phenomenon is being widely experienced in the Eastern Europe even as some economies of the West experiment with more statist orientations.

Viable competition among business firms in each market is the sine qua non of market capitalism. It is competition which ensures that firms efficiently produce only those goods and services demanded by the consumers of the society. But there is an inherent divergence of interest between the firms in an industry and their customers. Although customers surely benefit from adequate competition (lower prices, higher quality merchandise, greater product variety), firms might achieve greater profits in cooperation with each other or as sole monopolists of their respective markets.

Governments of democratic societies then find rationale to undertake the promotion and preservation of competitive conditions in their economies. This is usually done by enacting legislation which declares the existence of monopoly to be unlawful (in the U.S. this is accomplished by Section 1 of the Sherman Antitrust Act) and the perpetrator of monopoly to be guilty of an unlawful act (Sherman, Section 2), or which enumerates specific acts or activities which diminish competition and which are thus unlawful (the Clayton, Robinson-Patman, and Wheeler-Lea acts). But the enactment of legislation alone is not enough. The government must further establish an enforcement authority (in the U.S., the Federal Trade Commission and the Antitrust Division of the Department of Justice) and resolve to make effective the enforcement of the relevant legislation. This resolve may differ significantly according to the political party in office and the particular agenda which it is attempting to implement.

The managerial implications of the determined enforcement of laws which are intended to preserve and maintain competition are that managers of business firms must make themselves knowledgeable of the pertinent laws, and they must make calculated judgments as to whether to risk violating such laws in any of their sourcing, producing, or marketing activities. It may also be worthwhile to note that in a society governed by law (as is the U.S.), innocence is presumed until guilt has been established. The significance of this is that no act undertaken by the management of a business firm is necessarily in violation of the law until it has been tested in the courts.

In a legal environment of presumed innocence, even though a law may declare a certain act unlawful and other firms engaging in the act have been indicted and successfully prosecuted, the act may be repeated by yet another firm. In order for the firm to be penalized under the law, the act must be detected, indicted by an appropriate legal authority, and successfully prosecuted in court. Because failure may occur at any of these stages, the management of a firm may behave rationally to assess the probability of detection, the probability of indictment if detected, the probability of successful prosecution if indicted, and the magnitude of the penalty if found guilty under the law. Then if the “expected value” of the penalty (i.e., the conditional probabilities multiplied by the likely penalty) is judged small enough, the management may deliberately assume the risks of detection and prosecution by engaging in the act. Indeed, it is not uncommon for business firms to maintain legal staffs or contingency funds to cover legal fees and any penalties which are actually assessed.

Two cautionary notes are appropriate at this point. First, even though the behavior described in the paragraph above may be rational, the reader should not take this acknowledgement as an advocacy of the assumption of risk in knowingly breaking the law. And second, although the liability of corporate shareholders is limited to their investment in the firm, corporate managers should beware of the possibility of both criminal prosecution and civil liability suits when their firms have been found guilty of violation of the law.

Suffice it to say at this point that the rationale is based upon the conclusion that the particular allocation of resources resulting from the normal functioning of the market economy is not satisfactory and needs adjustment. This conclusion may emerge if there are so-called “public goods” desired by society but not producible in response to market incentives, or if there are positive or negative externalities (or “spillovers”) resulting from the market production of goods or services. The managerial implication of this rationale is that declining profits or losses will likely emerge in industries from which resources are diverted, but profitable opportunities should be found in industries toward which resources are reallocated.

The income redistribution rationale follows from a social and political judgment that incomes are being inequitably distributed across the population of the society by the normal functioning of the market economy. There is little doubt that any market economy distributes incomes unequally because of the fundamental reward mechanism of capitalism: to each according to his or her contribution to the process of production of demanded goods and services. Since members of any population possess differential abilities and experience varying intensities of drive and motivation, there will occur different contributions to the production process, and as a consequence an unequal distribution of income.

Social action becomes warranted only when it is judged that the inequality of distribution is also inequitable. The governmental vehicles for redistribution include progressivity of income and profits taxation, the taxation of capital appreciation, and any of a wide range of possible transfer payments. One managerial implication of governmental redistribution is that business net incomes, assets, and wages paid are likely to be objects of taxation to raise revenue for redistribution to lower-income members of society. Another is that businesses catering to transfer recipient clienteles may benefit from the redistributions. However, there may be little hope for managements of business firms to exert significant control or influence upon the political process which determines how incomes are to be redistributed.

The rationale for bringing the offices of government to bear upon the stability of the economy is based upon the view that market economies are naturally unstable, that the degree of instability is intolerable, and that some force must be applied to counteract the natural instability of the market economy. Of course, the only entity in the economy which can possibly bring enough force to bear upon the problem of instability is the government.

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SharePoint Federated Identity Process – Part 3 – Exploring the SharePoint Federated Identity Solution

There is a solution here, and that is for both businesses to be able to log into the software component order system. The manager of ARB Security Solutions is able to get the information he needs without thinking about what is going on behind the scenes to make that possible. He won’t need anything special in order to gain that access.

There are several steps that have to be followed to successfully offer access to a user that is in another security domain:

  • The client from ARB Security Solutions trust domain has to send a request to the software component order system application that is within the Adam Buenz’s Software House trust domain.
  • The application is redirecting the client to an issuer that is within the Adam Buenz’s Software House trust domain. However, the issuer won’t need to have any knowledge of who this issuer is to do so.
  • The Adam Buenz’s Software House issuer then redirects the client to an issuer in the ARB Security Solutions trust domain. There must be a trust relationship in place for this to occur successfully.
  • The ARB Security Solutions issuer is going to verify that the identity of the user is legitimate. Then it will send a token to the Adam Buenz’s Software House issuer.
  • The token will be used to create another token that a user from ARB Security Solutions is able to use for the software component order system. As this token is sent to the application, some of the claims will be removed and others can be added if necessary in order for the software component order application to work properly.
  • The application for the software component order tracking system will extract the claims of the client from the security token. Once everything has been authenticated then the authorization will be completed.

The issuer from Adam Buenz’s Software House will be the mediator between the application and the external user. The FP in place has a couple of responsibilities to cover. They have to develop a trust relationship with the ARB Security Solutions issuer. That is the only way it will be able to accept and understand the claims sent from ARB Security Solutions.

The FP must translate ARB Security Solutions claims into something that the software component order system can easily understand. The application is only going to accept claims from Adam Buenz’s Software House so there has to be an assignment of permission in place. Since the claims for ARB Security Solutions aren’t issued from Adam Buenz’s Software House there aren’t any roles here. The ARB Security Solutions claims have to establish the name of the company as well as the name of the employee. Transforming rules are used here to get one claim accepted by another. This is frequently referred to as claims mapping.

There is a claims rule language found in the ADFS so that you are able to successfully define the behavior of identity claims. These rules allow a set of conditions to be true so that you are actually able to issue claims. Right now we won’t be using the name of the employee but we will when we get to talking about the audit features.

When the manager of ARB Security Solutions connects to the software component order system they will have claims sent to the Adam Buenz’s Software House issuer who is also the federation provider. This will then allow them to be transformed into a new set that is going to be easily identified by the Adam Buenz’s Software House claims.

The solution here also involves a home realm discovery being put into place. The software component order application has to know which issuer out there is in use. That way they can properly direct users for authentication. If a manger at ARB Security Solutions opens a browser then they can be authenticated through the information in that. Therefore they don’t have to say which company they are with.

The software component order application will be able to solve the situation by allowing the users to access the web application . There is a query string found in the link. The web application will look for that during the request being processed. The value of the URI for the partner federation server will be easily identified.

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