Turning Capex to Opex: What Works, What Doesn't

by Cesar Bacani, 07 November 2011

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capex cloud computing cost management opex outsourcing tele conferencing

I enjoy presiding over roundtable discussions. You get to pose questions to a relaxed group of high-level CFOs around a breakfast or lunch table, observe them in insightful interaction and even participate in peer-to-peer banter.

A recent roundtable organised by CFO Innovation with AT&T Asia Pacific Group, the regional arm of US telecom multinational AT&T Inc., is no exception. We invited 14 finance executives to talk about turning capital expenditures (capex) into operating expenses (opex) as part of cost management.

The free-for-all conversation yielded interesting insights about cloud computing services, outsourcing and other cost management issues that CFOs in Asia face today.

The consensus was that turning capital expenses into operating expenses should be part of the CFO’s cost management arsenal. “There are various benefits,” said Chia Chey Hui, who is Country CFO for Singapore and Area CFO for ASEAN & Pacific at Philips Electronics. Among them: standardising processes, having the flexibility to make changes to projects, gaining IT flexibility, and optimising use of office space.

Capex Vs. Opex

Internally, said New York-based Eric Weinbrom, Vice President for Finance at AT&T, “we ask ourselves: Do I want to build this myself [capex] or can I use my partners’ facilities to do things [opex]? It’s a function of looking at where the core competencies are in our business versus the things that we can outsource to someone else.”

“Like any other company, we spend a lot of time making capital decisions,” added another roundtable participant. “If you step back and ask: How can you spend US$19 billion and not have enough? The answer is: It’s easy.”

It was clear that the others at the table shared their mind-set – up to a point. “Opex can be more expensive than capex,” said Sirish Kumar, Finance Controller, Asia Pacific, at Motorola Electronics (he is now Senior Business Finance Controller at Nokia Siemens Network).

The company will need to pay operating expenses year after year, whereas capex payments end after a pre-determined period. It’s the corporate equivalent of buying versus leasing a car. Also, if opex increases, current liabilities may also rise and require financing through short-term loans, which are more expensive than the long-term borrowing that typically funds capex.

There are also the issues of security and competitiveness. “If you are giving your database to someone else to administer, I’m not sure whether you can sleep well at night,” said a participant. Spending on servers and other infrastructure to keep this business process in-house might be the better strategy.

The takeaway: Every company must weigh the benefits of capex versus opex in the context of its own unique circumstances, state of its balance sheet, financial condition and other issues.

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