Shifting Investments: CapEx vs. OpEx

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Managing a global infrastructure portfolio of new build-outs, ongoing services and modernization efforts is no small feat. But a thoughtful CapEx (Capital Expense) to OpEx (Operating Expense)  program can alleviate budget constraints — and allow you to focus on your core business.

I recently led a panel at the 2018 Innovation Summit Session in Atlanta called “Unlocking the Value of Your Assets: Shifting Investment from CapEx to OpEx,” where we discussed the rising shift in investment strategy from CapEx to OpEx for a host of investments. Below I’ll offer a high-level overview of the presentation, share three key trends we’ve observed in its transition and apply these findings to the case of aging switchgear.

Defining “CapEx” and “OpEx”

For purposes of this discussion, we’ll forgo the FASB accounting definitions and talk about these terms more practically. Here, “CapEx” refers to capital outlays and typically a major and rigid process for investment. Conversely, “OpEx,” or capital outflows, are associated with a more flexible process for investment. In recent years, there has been a noticeable shift from this inflexible investment process to one which is much more adaptable. Why the change?

Technology as an enabler:
Strong trend from CapEx to OpEx in IT

When we think of the origins marking the shift from CapEx to OpEx, the IT industry likely comes to mind with the rise of the cloud. Companies no longer needed to buy physical assets upfront, whether that was servers, racks or other hardware. Instead, they could use that capital to derive potential savings and benefits, whether that was having more controlled expenses or freeing up capital to be invested in other business areas. However, CapEx to OpEx is not just an IT phenomenon.

Using CapEx to OpEx to achieve simple and lower-cost switchgear

At Schneider Electric, we see this investment shift cutting across industries. And with this, we’ve seen rise of three separate, but related trends related to CapEx to OpEx, either driving that shift or driven by it. They are:

1. The rise of “as a service” models,
2. The move toward innovation in modernization vs. replacement of certain assets; and
3. The trend to more flexible financing options for various types of projects.

For the purposes of this post, we’ll focus on the second trend: a move toward modernization solutions rather than the replacement of certain assets using the example of switchgear. Instead of choosing to replace aging switchgear, modernization solutions take from 15 minutes to a few hours to install and can standardize a facility’s switchgear to modern standards. The solutions are not only easy to maintain, but also require fewer resources and can be less costly. The biggest benefit, of course, is that reliability and safety of the power distribution system can improve as the risks associated with unplanned outages and aging equipment decline. So how do modernization solutions work?

Replacement and retrofill low voltage and medium voltage solutions adapt the latest-technology circuit breakers into your existing OEM-built switchgear or switchboard cell. This enables an upgrade of the active components without affecting the cables in most cases — and taking on the risk and challenge of an outage replacement. Cost savings may occur immediately and include: lowered maintenance requirements across switchgear equipment (since all solutions operate and rack in the same way regardless of installed equipment brand), fewer spare-parts inventory and less inventory management (because there’s only one set of spare parts for all frame sizes, regardless of how many OEMs’ breakers are replaced), streamlined after-sales vendor management and finally, standard and modernized capabilities across switchgear.

Switchgear modernization is a boon for facility owners with aging and or mixed-OEM electrical distribution equipment. By using a replacement strategy rather than costly rip-and-replace, facilities can upgrade to the latest technology at lower costs. This is because modernization solutions enable the end customer to pull from (OpEx) budget dollars – they don’t have to go through the whole (CapEx) allocation process that they might have had to undertake with a rip-and-replace strategy. Modernization solutions are flexible with the option to customize for any need, and offer an easy path to standardized, streamlined maintenance over the long term. It’s truly a win-win: costs drop while safety and reliability may improve.

Switchgear modernization is just one example of using a CapEx to OpEx investment strategy to achieve greater utilization, value and flexibility in your core businesses. I encourage you to replay the Innovation Summit session for a deeper dive into the insights and perspectives of CapEx to OpEx programs shared by panelists representing companies from a variety of industries, including JLL, ArcelorMittal, Kyotherm and Outlier Energy. Their comments provide real-life examples addressing the “why,” the “what” and the “how”: why we’re seeing this shift in investment strategy, what their organizations have done about it and how they’ve gone about their approach.

And finally, when we talk about the rise in the trend from CapEx to OpEx, it’s not always the flashiest reason, but the practical reality is that sometimes it’s just the path of least resistance. Not having a pool of dedicated money upfront can be the impetus to make things go a little bit faster.

To learn more about CapEx to OpEx and the financial considerations when replacing aging switchgear, download our white paper: “Maintain, Replace or Modernize: Optimize Your Switchgear Investment.”