Hi there,
If I were U I would eliminate the second option, contracting services means spending money, this was never an effective process, what I understand from your question that u need to cut costs, which is reflected in your first option “reduction of staff” should you choose the first option you need to do the following;
•You need to stop recuruitment
•You need to profile all the jobs to know what value do these positions & people holding them add to the buinsess
•You need to have a very atractive compensation scheme to persuade the people you decided to make redundunt accept “make them an offer they cannot refuse” this requires a budget. There are a lot of offer u can make, either give them 12 months salary up front and let them go to find a job, keep them in the organsaiton for a period of time until they find a position else where, or the company can take an extra mile and help them find jobs else where.
•You need to have another budget to spend on training employees who will replace those who have been redundunt this will show during the job profile what trianing is required.