The Myth Of OpEx - Aditya Yadav


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The Myth Of OpEx - Aditya Yadav

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The Myth Of OpEx - Aditya Yadav

  1. 1. * “Running an Agile Fortune 500 Company” Aditya Yadav,
  2. 2. * A Typical Global Company * Fortune 500/1000 * 200 Divisions * 40 Countries * 25000 Employees *
  3. 3. * @ Acme Inc.
  4. 4. * Original Question “OpEx is the most fundamental financial model for running a business. Even our Management Consultants say so. Lets quickly convert everything from CapEx to OpEx and save money. Its great for our Cost Cutting Strategies too!”* The Correct Question - “Hold On! Lets start with the First Principles and Facts. Its not as Rosy as it seems. Allow me to explain!” *
  5. 5. * And The Philosophy Behind The Answer
  6. 6. * Capital expenditures (CAPEX or capex) are expenditures creating future benefits. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life extending beyond the taxable year.* An operating expense, operating expenditure, operational expense, operational expenditure or OPEX is an ongoing cost for running a product, business, or system. *
  7. 7. * I don’t want to get into the arguments from and against OpEx. But rather I will start afresh and start by stating some facts.* Around 2010 when the Cloud Computing & also the OpEx hype was in full swing. Mckinsey released a report which stated that Cloud’s cost 2.4x-3x compared to your own infrastructure.* Guess what? I read the report but I thought I will save it later and before I knew Mckinsey removed it. And it cannot be found on the Internet today. We all know why. ;- )* We know Maths too so we did some calculations and we came up with virtually the same conclusion i.e. 2.4x-3x times more expensive* Golden Rule: OpEx will cost a minimum of 2.4x-3x in 80% of the cases even if you apply this rule blindly.* If your counter argument is based on “Economies of scale” we will tell you that someone somewhere has to bear the cost and make profits too, and flexibility comes at a cost* And then to resolve the deadlock between us we will resort to data and financial calculations. ;-) No hard feelings!!! *
  8. 8. * Its very difficult to get approvals/budget for CapEx so everyone loves to go the OpEx way* Everyone seems to be in a cost cutting mode and OpEx seems logical on the look of it* There are a lot of vested interests that don’t allow reality to surface* Example: * I once asked my friend, we both smoke, to come with me for a lung checkup * He said If I find out my lung has a problem I will be Sc#$#d * On the contrary I think if he doesn’t go for checkups and find out about health problems the hard way then he will be Really Sc#$#d* The Reality: The truth is out there, everyone has basic Math’s skills or in the worst case every company has a Guy called the CFO who can do these calculations. R’ber there are a lot of Vested Interests! People are scared of finding out the truth. *
  9. 9. * Lets do some maths* If OpEx costs 3x (Of the CapEx NPV) and the time period of investment is 4 years. Then we have: 3x * y = x *(4-y)* Basically you should start with the OpEx model for 1/4th of the investment duration. And then move to CapEx for the rest of the 3/4th of the duration.* This works great for Startups and is consistent with the Reality.* This works great for Larger companies taking a Portfolio Approach to Innovation, minimizing Capital Risks *
  10. 10. * “Aditya are you saying I should roll back my outsourcing efforts to a vendor in India and bring it inhouse?”* Ok before you call me an Idiot. The cost structures between US and India are different.* So according to me you should Outsource to a Vendor in India for 1/4th the duration so that you capitalize on the Cost Structure Delta, and Minimize [ ;-) ] Risk.* And then you invest and start a captive in India for the next 3/4th of the duration.* But then you will ask me what is the duration of a Captive? 10 years, 20 years or Infinity?* The answer is in the Amortization and Depreciation Time Frame of your Assets in the Captive you plan to setup.* MTV Enjoy! *
  11. 11. Aditya!!! *