Getting Smart with Digital CapEx

By Sairam Bollapragada & Rajesh Mohandas

History has taught us an important lesson in decision making, one such postulate is to look for long term losses before eyeing at short term gains. The recession of the early 1990s describes the period of economic downturn affecting much of the world in the late 1980s and early 1990s. The global recession came swiftly after the Black Monday of October 1987, resulting from a stock collapse of unprecedented size which saw the Dow Jones Industrial Average fall by 22.6%. While the Progressive Conservative government of Brian Mulroney in Canada and the successful election campaign of George H. W. Bush in the United States may have been aided by the brief recovery of 1988, neither leader could hold on to power through the last part of the recession.  Both were swept from office by opponents running on pledges to restore the economy to health… the decade of 1990 saw significant change in the global economy with a wide emphasis towards SERVICE DRIVEN ECONOMY.

Thanks to many technological developments over the past half century, today we have instant access to a vast array of information sources and are able to exchange new information with the rest of the world in real time. The tremendous increase in Internet access has brought people, businesses, and countries closer, while mobile communication has become cheaper and more accessible. International virtual global communities’ formation was available with forums to exchange and discuss ideas, create path-breaking solutions through innovative crowd-sourcing, etc.

The world economy is 6x larger than it was half a century ago, growing at an annual rate of 4% during the period. New technologies have paved the way for more efficient production systems in a wide range of industries and promoted economic growth. One such significant transformation one can notice from the 1987 Black Monday until today is the shift in mind-set from ownership to collaboration which gave rise to the “AS A SERVICE” thought process, and eventually as-a-service economy. The could computing references can be drawn from the visionary John McCarthy who wrote “computation may someday be organized as a public utility”. Furthermore, the 9/11 attacks and the double dip of early 2000 brought in a complete transformation where corporates shifted from CapEx to OpEx, multiple start-ups grew as mushrooms and died a natural death due to lack of right planning and investments.

Fast forward >>… Today, when compared to the earlier generations, the millennial generation has accepted security threats and larger risks as a part-and-parcel of daily life and is more futuristically optimistic. Entrepreneurs of the future have realized that growth needs right upfront investments and that will be reaped for a long time operational expense savings heavily. However, the point to remember here is that the famous theory of Pay-as-you-go and On-Demand are tied with Inflation that impact your budget. The start-ups with right business case today hit venture capital companies who are eager to invest and wait for long run to reap the benefits.

The transforming technology of tomorrow needs to invest in the right spots today, unlike the 1980’s to 2010 where things were more focused on leveraging technology to support business, the last few years have seen disruption with technology driving the business and no more playing a supportive role. Today the big elephants of the yester era who ruled the fortune 500 are reporting an annual growth of 2% to 5% CAGR while companies that are into the Digital business are reporting multi-fold gains – Facebook is one such example who reported a whopping 117% growth in the previous quarter.

The significance of CapEx in business budgets is that it demonstrates how much a business is spending to invest in its future. The OpEx which was critical in the services industry where a string of large clientele were focussed on annuity and service continuity business, had compulsions of pushing CaPex down for long. However, in the Digital era, the two are flipping ratios and priorities attempting to come to terms with the reality of the Digital-business-quotient fuelled competition. In many cases, the CxOs are blurring the line between CapEx and OpEx.

Talking about Digital Economy, the pushing of Digital envelope is becoming critical to the survival though, for example, investment in cloud would not necessarily mean better software quality or faster development. If your or your clients IT organization has very rigid operational silos, cloud can still not improve the business Agility. You may only be shifting the ‘speed to deployment’ problem to cloud.

Similarly, when you speak of mobility, creating your software services to ‘availability anywhere’ work culture within or outside of an organization requires investment into creating these lighter versions available on range of devices.

revenue-and-ebidtaEvery econd day there is news about the Fortune five hundreds foraying into TRANSFORMATION JOURNEY, but unfortunately they are marginal continuous incremental improvement they are engaged in and not breakthrough transformations. To survive and just not to sustain (growth comes later) out of box and breakthrough transformations are becoming new norm of the day. Smaller entrepreneurs are bringing in implementable ideas to the table pretty quick and fast thus challenging the big white elephants who have been resting on their laurels for long. OpEx evangelists promote the ideas that “money available at the present time is worth more than the same amount in the future due to its potential earning capacity”, on the other hand the raise of quick win is impacting long term investment decisions regarding CapEx which are critical not only because of the size of spend, but also from the point of view of an organization’s strategic goals. “Imagine that you had to drive from New York City to Los Angeles. You’re in downtown Manhattan hopelessly stuck in traffic. Bicycle messengers are whizzing past. You jump out of your car, sell your car on the spot at a ridiculously low price, buy a bicycle and continue your trip to West Coast. As absurd as this scenario sounds, CxO’s do it every day when they make short term OpEx decisions for long term CapEx journeys.” The diagram on the left (IDC-June 2016) indicates strong wins towards longer customer retention in the digital turbulence. The longer the relationship, the better is the profitability (EBITDA).

Inertia challenges change in larger organizations and hence paves way for inorganic growth. The larger the organization the more complex it is to break the CapEx-OpEx norms. Hence the redefinition of CapEx-OpEx is becoming more compulsive. WhatsApp and Facebook together in the past couple of years have built one of the largest customer bases in the social media market making itself a very powerful influencer in the digital space. Shopify, a Facebook’s e-commerce platform with social media integration is waiting to happen with approx. 500 million targeted users. This is indicative of entities who are thinking radically different to stay ahead of the curve. Now one wonders where the lines between CapEx-OpEx were drawn in this context….!

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