OpEx as Investment: How To Spend More Strategically
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Business as usual. Never have three seemingly innocuous words offered such an impossible vision of corporate life. There is nothing usual about business -- ever. And never has that been more true than in today's fast-paced, technologically driven, globally interconnected world.
As their external environment changes, companies must continuously reallocate resources in order to take advantage of opportunities and sidestep threats. Yet many organizations still manage large portions of their business in outdated and suboptimal ways. One area stuck in a time warp is the management of operating expenses (OpEx). Capital expenditures (CapEx), with their large multiyear budgets and fancy Gantt charts, get a lot of attention. CapEx is what managers often talk about when they discuss optimizing investments. Meanwhile, they budget for OpEx by growing each line item by a set percentage year over year; then, when times are tough, they cut certain expenses to hit a somewhat arbitrary number. Organizations put substantial effort into rolling up OpEx line items in the corporate budget but do little, if anything, to strategically manage the allocation of resources that OpEx represents. The entire process fails to account for the fact that discretionary OpEx investments in marketing, sales, operations, people, and other areas of the business deliver the results that sustain the enterprise and ultimately determine the winners and losers in an industry.
We are not talking about small dollars here. Research by the Corporate Portfolio Management Association (CPMA) reveals that, on average, 25 percent to 40 percent of OpEx is discretionary. Businesses need to make systematic decisions around where to invest this potentially massive pool of discretionary resources. They need to break free from the mentality, handed down from generation to generation, that says OpEx should be minimized and that managing it is an accounting exercise rather than a strategic activity.
What Is Discretionary OpEx, and How Should It Be Managed?
In basic terms, discretionary OpEx comprises all expenses that are not required to keep the proverbial lights on -- that is to say, all spending that is not required for a company to be a participant in its industry. Operating expenses vary by company and by industry, but in any organization's day-to-day expenses, aspects of virtually every line item are discretionary. For an airline, having passengers' bags show up is not discretionary; however, using RFID technology to enhance the baggage retrieval process is. Discretionary OpEx generally includes spending on marketing, sales, and IT, as well as investments in operations, research and development (R&D), and innovation. Portions of salaries and benefits can be considered discretionary as well, but politically and operationally, that position is usually not advisable.
Defining an operating expense as discretionary does not classify it as unimportant. For example, labeling marketing spending as discretionary doesn't imply that the company can do away with it and still expect to grow. What it means is that within marketing, managers are making decisions about marketing channels (e.g., newspaper versus Internet ads) that involve discretion. The organization is also making choices between doing more marketing and investing in operations. Decisions like these are made in every company every day; they are the spending choices that become more strategic when a company introduces rigor into the OpEx investment process.
A few forward-thinking companies, including American Express, have introduced this rigor by implementing a corporate portfolio management approach to discretionary OpEx decision-making. They operate an internal, companywide marketplace in which both CapEx and discretionary OpEx investments compete for resources based on their strategic value and their level of risk. And the aim of this marketplace is to select those investments from across the company that offer the best return, financial and strategic, per unit of risk.
