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The establishment and further development of a company requires a far-sighted capital strategy from the outset. At the core of this is the trade-off between securing business operations through investment and maintaining financial flexibility.
Asset-light strategy: How to optimise your capital in the long term
Changing challenges due to increasing digitalisation and growing competitive pressure due to globalisation place additional demands on flexibility. Last but not least, economic crises (this article was written during the global Corona pandemic in 2020) show us the high importance of secured liquidity in order to remain able to act.
What is behind the Asset Light strategy?
A question that concerns every company is where and to what extent ownership of assets is necessary and sensible for a company. There is no binding "right" or "wrong". Rather, the optimal ratio of own assets to outsourced ones depends on the business model and can differ further depending on the industry. In recent years, however, there has been a clear trend towards the so-called asset-light approach.
Definition - What is Asset-Light?
Asset light" is essentially a business model strategy and the question of how a company sets up and optimises its balance sheet. A company is therefore "asset light" if it has (relatively) little ownership of assets, i.e. only a small amount of fixed assets on the balance sheet. The asset-light strategy is particularly common among companies in the service sector, which in principle require little capital for business operations. The best-known examples include well-known companies such as Airbnb and Uber or providers of co-working spaces such as WeWork.
Another very well-known example of the asset light approach is the company Apple, which outsources numerous areas that cause high investments (production facilities, personnel) to third parties.
Comparison: Asset Light vs. Asset Heavy
It is true that more ownership of assets (asset heavy approach), e.g. production facilities, gives a company more control over these assets, which prevents knowledge ("intellectual property") from being passed on to outsiders. On the other hand, such ownership massively ties up the company's capital ("working capital"), which consequently cannot be used for other purposes.
The asset-light concept developed from this circumstance. Companies with reduced working capital are usually much more flexible financially and can thus react more quickly to changes. In addition, secured liquidity is necessary to bridge times of crisis.
In addition, the asset-light approach offers a number of other advantages compared to the asset-heavy approach:
Scalability
When using own assets, production can only be increased to the capacity limit. Further growth is only possible through extensive investments in production facilities and infrastructure, which in turn increases fixed costs and ties up capital. Provided that the external partner guarantees the increase in capacity at all times, the company's turnover can be increased (scaled) at will in the case of outsourcing. Appropriate contract design and entrepreneurial planning foresight are indispensable. However, this also enables financial security in critical times, as variable production capacities can be flexibly reduced as a variable cost component.
Distribution of profits
Scalable business models offer increasing profitability with increasing turnover. Therefore, they are particularly interesting for investors, as increasing profitability also means increasing profit distribution.
Knowledge aggregation
Asset-light companies focus only on their core business and outsource non-core activities to external partners. As a result, they also benefit from external expertise in many non-core areas that the company itself could not achieve to the same extent in these areas.
How does my company become asset-light?
In general, the transformation from asset-heavy to asset-light means that companies replace tied-up capital (long-term fixed assets or capital expenditures - CAPEX) with flexible, ongoing operating expenditures (OPEX). These operating expenses can be quickly adjusted (reduced or increased) and are 100% tax deductible. In the case of CAPEX, only depreciation is tax-deductible, which is often lower than the corresponding OPEX). In the event of a crisis, it is also difficult to liquidate these and make the tied-up capital available.
Why a shift from CapEx to OpEx is worthwhile for your company!
What asset-light models are there?
If you want to switch to a (partial) asset-light strategy, the question arises as to how a transformation is possible. Below we explain the advantages and disadvantages of 3 common models.
1. leasing
With classic leasing, high initial investments are avoided through long-term financing. Instead, the assets are financed by fixed monthly instalments, usually over several years.
- The advantage of leasing is that companies 1.) avoid tying up a lot of capital through investments and 2.) stretch the financial burden over a long-term oriented period.
- The disadvantage, however, is the lack of flexibility in the contract design. Leasing contracts have a fixed term and do not provide the lessee with a flexible option for early exit. A company can therefore not react flexibly to its own needs or economic conditions, e.g. crises. In addition, the leased items must be capitalised in the balance sheet and only the depreciation (the loss in value) can be claimed for tax purposes. Strictly speaking, therefore, leasing is more of a financing vehicle and less of an asset-light financing in the true sense.
2. sale-and-lease-back
Sale-and-lease-back is a sophisticated variant of leasing. In this approach, the company's own assets (e.g. buildings, production facilities) are sold. The buyer then becomes the leasing provider from whom the assets are leased back over several years.
- The big advantage here, also compared to normal leasing, is a high one-off cash inflow from the sale, which initially leads to increased liquidity. Depending on the asset, the leasing instalments are financed over a long period of time and keep the financial burden constant at a lower level.
- The disadvantage remains that - analogous to the simple leasing approach - the ownership of the leased object is transferred to the lessee, who is thus considered the owner. You only benefit from this model if you already own assets that you can sell and then lease back. Instead of real flexibility, this approach is more of a financing approach and less of a measure to become truly asset-light.
3. rents
Although renting is well known in the business environment, it is usually limited to premises and real estate. You pay a usage fee (usually monthly) to the owner and in return you get the rented object for use. In recent years, there has been a clear trend towards the rental model becoming established in many other areas of application. Renting is a very effective way to make one's own business model asset-light.
The advantages of the rental model are quite diverse:
- Investment avoidance: Even when renting, high investments can be avoided at the beginning. Expensive facilities and equipment can be provided cost-effectively and promptly.
- Low financial burden: Instead, regular instalments are to be paid for the use of the assets, which places only a small burden on the cash flow each month.
- Maximum flexibility: As a rule, there is also the possibility to terminate the lease flexibly and thus react quickly to growing or declining demand. Leased assets are not property, which is why they do not need to be capitalised in the balance sheet.
- Tax advantages: The rents paid can be claimed 100% as current operating expenses for tax purposes. In many cases, these are more relevant than any depreciation, which according to the AfA tables for furniture, for example, can be divided and claimed on a straight-line basis over 13 years.
However, depending on strategic importance or availability, it can be a disadvantage that the tenant does not acquire legal ownership of the assets. Consequently, there is no control over the goods beyond the agreed purpose of use.
For which assets is the asset-light strategy suitable?
A company-wide asset-light strategy is not suitable for every industry. For telecommunications companies, for example, extensive ownership of assets is mandatory, as the operation of the network infrastructure represents their core business and is a driver of profitability. Nevertheless, it is possible to reduce the share of owned assets in individual areas.
To answer the question of which assets a company is better off owning and which are not, BCG's experts have developed two simple guiding questions to help select the right assets:
Translated, this means: goods and assets that are essential for securing competitive advantages should generally be owned by the company itself. These are usually an essential part of the core business and ownership can therefore be important to minimise business risks. The same applies to goods that are rare and therefore difficult to obtain. If both of the above questions can be answered with "yes", an asset-light strategy is possible and makes sense.
Example: Office equipment
An illustrative example of assets that are neither strategic nor difficult to procure in companies are office equipment items. Unless the company is in the market for office equipment, furniture and IT equipment for employees are indispensable for the business, but not strategically valuable and also easy to procure. Moreover, the acquisition of new furnishings is initially associated with high investments.
For the implementation of such an asset-light strategy in terms of office equipment, the rental of furniture is suitable.
Scenario 1: A start-up from Berlin buys new workstations for its 100 employees and pays 2,000 euros per employee for this furniture. Thus, the company spends 200,000 euros in one fell swoop.
Scenario 2: The same start-up rents the office furniture and thus spreads the costs over a period of two years. The company pays only 100 euros per employee per month.
Very high initial investments (scenario 1) are offset by low monthly rental expenses (scenario 2), which can be covered by the monthly revenues. On day one of the decision, the company has liquid funds of € 198,000, which can be used to increase the core business.
For a large number of companies, the asset-light approach is the right decision. Companies become more flexible, can increase their turnover and secure liquidity even in times of crisis - decisive advantages in an increasingly competitive global market.
