How to choose your OpEx partner

In the last post, we talked about benefits of an OpEx model over a CapEx model. The post primarily compiled information and experience shared by multiple people, agencies, experts in past few years. Yet where we lack any advice from experts is how to effectively apply this knowledge to use an OpEx model in expenses other than real estate, SaaS, web space and IT infrastructure.
This post is an attempt to encapsulate some principles on the same from our long experience and varied experiments with OpEx. Purpose – to help you decide how to choose your OpEx partner or service provider.

A common example of OpEx in electrical infrastructure is renting appliances such as air conditioners, refrigerators, washing machines etc instead of buying them. Makes sense for people who keep moving from city to city for work or education. And there are a number of service providers who provide this service, and aggregator platforms where you can find them.
A big problem in this service most times is that the service consists only of delivering the appliance and not the performance of that appliance.

When you rent an air conditioner, the service provider may tell you the age of the appliance and features built in it.
But a number of doubts may remain unanswered, or if answered, may not be benefitting the customer. A couple of them as follows –
– How efficiently will the AC cool the air or regulate the temperature?
– How long will it run without breaking down?
– Who will pay for the maintenance?
– How much electricity will it consume?
– If it breaks down, who will pay for the damages?
– And not important to everyone, but very important to some responsible ones – what carbon footprint will it leave behind?

Then how is it better to rent an appliance instead of buying it? Isn’t the quality and performance assured and more consistent when you buy one?

Well, yes. But this problem can be fixed if the service contract answers the above questions making it favourable for the customer. It means that the service provider owns the performance of the appliance, which is the final outcome you want from the appliance.
Everything necessary to maintain the performance level then becomes the service provider’s responsibility.
Of course, the pricing will also go up as the cost and risk both go up for the service provider.
But it will still be economical for the customer, for all the reasons we discussed in the last post – Why turn OpEx from CapEx, especially if the customer is a business.

So the moral of the story is to make sure your service provider owns the responsibility of the following –

  1. Regular maintenance – Be it monthly, quarterly or at some other interval, regular maintenance by experts will ensure performance as well as will result into zero or less number of breakdowns.
  2. Performance level – For example, for air conditioning on OpEx basis, the service should mean not just renting the AC, but maintaining the desired temperature or temperature range, or ability to change temperature as and when required, based on the customer’s need.
  3. Consumption of resources- It could be electricity, it could be water, or something else.
  4. Eco-sustainability – The amount of soot emitted by a vehicle, the amount of greenhouse gases emitted by an AC, or in short, carbon dioxide equivalent added to the environment by the appliance.
  5. Efficient service – Does the service provider solve your problem fast or do you have to run behind them for it? Does this service save you time, efforts, resources and headache or does it make things more complicated for you?

Though the above are written keeping electrical appliances in focus, these criteria can be applied to any OpEx service you need.

And most importantly, does the service make your life easier? Does it let you spend more time and resources on your core area of business or on other more important things?
If yes, you have found ‘the one’!

Why turn OpEx from CapEx

When we heard the terms CapEx and OpEx a few years ago – capital expenditure and operating expenditure, most of us used to dismiss them attributing merely the accounting value to them. Recently have people started perceiving the differences between CapEx and OpEx business models and in turn, the benefits they bring. In this article, I am going to discuss why business should consider to turn OpEx from CapEx.

In simple words, CapEx is buying an asset and OpEx is leasing or renting or leasing it. Be it a tangible asset like land, house, infrastructure or intangible asset like a software or a patent. In other words, to turn OpEx from CapEx is outsourcing something rather than buying or doing it yourself.

There have been various views on whether CapEx is better or OpEx for a company. A wise man once said, “If it appreciates, buy it; if it depreciates, lease it!”

A lot of us still favour CapEx, as since ancient times owning an asset has been considered aristocratic.

There is another view advocating CapEx, which looks at the payback period of the investment versus total value of lease payment over years in OpEx. However, these advocates fail to consider the further expenses in addition to initial CapEx. Timely maintenance, spending on supporting infra or people, replacement in case of failure or in case of technology obsolescence and most importantly, money, time and people locked around this investment.

A third view favouring CapEx is the benefits of booking large depreciation in a company’s taxation. This is a real benefit unlike the first two. However, it gets overpowered by benefits of OpEx model.

From the experience of numerous businesses (and also of individuals), there are multiple benefits of OpEx model.

Firstly, in an OpEx model, one doesn’t need to make the fat investment upfront and breaks it down over a number of small payments at regular intervals. This helps in multiple ways. Making a budget decision for small periodic payments becomes much easier than making a decision for a huge one time expense.
It also balances the cash flows of the company.
Renting a flat instead of buying one is a classic example of this.

Secondly, OpEx help one get their focus better directed to their core function. A couple of examples to site here.
For a bank, it doesn’t make sense to have their own software development team to build a productivity software. They would rather outsource it, and focus their efforts, money and time on banking.
For a hospital, the core function is medical care. So they would (or should) rather outsource the reception and housekeeping staff than hiring on their own payroll, so as to not divert their focus from medical care to trivial operational tasks.
Another classic example to which a lot of working people can relate is outsourcing household help. The OpEx model with household help frees up considerable amount of time and energy for people to invest in more important responsibilities.

Thirdly, and in my opinion most importantly, it help the business be more flexible and agile. Agility of business can be translated in easy words as ability of a business to supply the right amount – no more, no less – with frequently and radically changing demand. For internal operations, it means availability of resources for operations according to changing needs with minimal or no redundancy.
When one is investing in hiring people or buying infrastructure, they need to make arrangements for current requirements as well as predict future requirements, and fulfil it to the full scope.
In OpEx, a business can always rent as much capacity as necessary and doesn’t have to worry about investing in and maintaining redundancy.

Lastly, when you buy tech infrastructure, you are stuck with it till its lifetime. In today’s world, technology advances much more rapidly than the lifetime of a tech product. Once bought, one has only two options in case of new, more efficient or more effective technology is available – dispose of your old infrastructure as scrap and again invest in new infrastructure or keep using the old one and be sad about it!
On the other hand in OpEx model, one doesn’t need to worry about the technology obsolescence.

Of course, there are things one must take care of while moving from CapEx to OpEx. Right precaution must be taken in order to milk the benefits of this model. However, it is definitely a step forward towards being the ace of one’s core business rather than a jack of all trades needed to run the business.

A lot of experts have written about moving the IT and telecommunications infrastructure from CapEx to OpEx model in last decade, along with moving to SaaS models from investing in building your own softwares. A lot of writing is also available on how renting a house is a better option than buying one. The consumers are well aware of nitty-gritties of transactions in these markets.

In the next article, we will take a look at such precautions while dealing with mechanical, electrical infrastructure and capital equipment in OpEx model.

Robust Energy Infra – Dream or Vision?

Year 1998.
When Dr A.P.J. Abdul Kalam wrote his vision for India 2020, he scripted his idea and foresight about various areas of development. While writing about enabling infrastructure, among roads, railways, IT, communication, internet connectivity, he said, “All the  above  depend  crucially on energy and  especially the assurance  of quality electric power to all Indians and for all sectors of economic activity. Sometimes one wonders whether we can have such a vision at all! How many power cuts plagued us while we wrote this book!”

Quoting Dr Kalam again, “No nation  can aspire  to be  modern and  developed  without the  availability of quality power for all. No modern machinery can run without uninterrupted  and quality power systems.”

Today we are on the verge of entering into the year 2018. Twenty years passed.
To underline the time passed – Kids who were born when the book was penned down are going to college today!

Can we answer the hesitation in the question today? Can we have such a vision at all?
The condition of power cuts may have improved to a great extent in metro cities. But for the rest of the country, it hasn’t moved much further from what it was then. This fact with availability of power is true with the quality of power as well.

We, at Sharp Power, embarked on our mission to provide uninterrupted and conditioned, high quality electric power to businesses and households thirty-one years ago, in 1987. We paved our way through manufacturing, leased power solutions to designing energy efficient green infrastructure for businesses.

Today we have become a trusted Power Conditioning partner with our customers – senss! Sharp Energy Saving Solutions!
We do have a long way ahead in realising our vision – a vision of India with uninterrupted and quality power systems, a vision of India with robust energy infrastructure. But yes, we can say with confidence that this is not just a dream, but this is the vision we want to walk towards.

More about us coming soon…