The Myth Of OpEx - Aditya Yadav

1. *
“Running an Agile Fortune 500 Company”
Aditya Yadav, aditya.yadav@gmail.com
in.linkedin.com/in/adityayadav76

2. * A Typical Global Company
* Fortune 500/1000
* 200 Divisions
* 40 Countries
* 25000 Employees
*

3. *
@ Acme Inc.

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. *
And The Philosophy Behind The Answer

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. * 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. * 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. * 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. * “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. Aditya!!!
*