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Why opex beats capex for finance and HR

Why opex beats capex for finance and HR

What if you had a capital asset costing more in operational expenditure every one or two years than it was worth. And, for that 1–2 year cost, you could replace it with a better performing asset that was structured as an operational cost. It would be obvious that it was time to replace that asset. However, that is not how most Finance and HR people feel about their old technology systems. Most of them have endured very expensive Enterprise Resource Planning (ERP) projects. And, when you have spent so much money, you want to sweat that asset as much as possible. This raises the question – how does the new opex world compare with the old capex one?

Craig Edwards

Director, Finance Strategy & Performance

KPMG Australia


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Business insight versus transactional processing

Much of finance and HR is done for legislative or compliance reasons. Organisations don’t want to spend more than they have to, and they are always looking to do more with less.

Many ERP systems achieve the opposite. Processes are not fully standardised and systems are heavily customised. As a result, every organisational change or functional upgrade entails expensive software redevelopment.

As organisations transform themselves, much more is expected of Finance and HR. They need to support the business and continually look forward, to deliver comparable, up-to-the-minute information and insights.

When an invoice gets put in, or a new hire comes on board, it should be immediately visible. Most ERP projects ran out of time or money before they got to that stage. With the right organisational structures, processes and systems, however, that goal is now within easy reach.

Align the business with technology

When KPMG gets involved in transformation, we look at six layers – technology, service delivery, people and organisation, processes, reporting, and governance – and how they can be aligned to support finance or HR.

In the new world, software is configured, and expensive customisation is a thing of the past. KPMG has gone one step further with preconfigured Finance and HR systems that show you, for example, what good processes and good governance look like, and the KPIs and controls. Design is now more of a validation activity focusing on discussions for what’s best for your business, across the 6 transformation layers, rather than focusing on getting technology to work. Ultimately this leads to a reduction in risk and time to value.

If, for example, you want to change the organisation in one state geography. With ERP, the technology change could take 6 months. With a modern cloud-based system the change could be configured in minutes.

That informs a conversation about what the change should be. You can look at all the layers: How is your service being delivered? Do you have the right people? Is your organisational structure aligned? Are your processes lean? Do you have the right governance in place?

Invest in the business, not just technology

In the new world, we are seeing huge reduction in the technology component of transformation project costs compared to an on premise implementation,, only around one 10th of the initial transformation project is spent on technology. Far more is expended on process re-engineering, operating model redesign, service delivery redesign, and change management.

From that point on you only have operational expenditure, not a depreciating asset. And that opex will be a fraction of previous license fees, systems maintenance, computer hardware, networking, mobility support, additional reporting, security, and database administration.

In projects we’ve worked on, the payback time is 1-2 years. The end result is a major and permanent reallocation of expense away from technology towards continuous process and business improvement.

Whether it be large ASX 100 companies looking to remove technology constraints impeding efficient and effective business practices, or mid-market customers that realise you no longer need millions to implement a top-tier ERP solution.

Meanwhile, others are still sweating their old assets. It won’t be long though until the penny drops.

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