15 May 2017

Capex vs Opex: The changing trends for IT spending

With the rise of as-a-Service delivery models, IT departments are faced with decisions beyond choosing the right technology. There is now a range of payment options to choose from, and the trick is to know which one is right for your company and your current project.

What are Capex and Opex?

Capital Expenditure (Capex) is normally used for major investment and is shown on the company’s balance sheet. The capital is exchanged for an asset, which can then be amortised and depreciated over its lifespan and can add value to the business. Operational Expenditure (Opex) is used for ongoing expenses. It’s shown on the profit and loss statement, and it isn’t exchanged for tangible assets. However, Opex is usually tax-deductible, which may offset the fact that it doesn’t deliver an asset that can be depreciated.

The first step is truly to understand the breakdown of IT-related costs. Along with the obvious costs of infrastructure, hardware and software, there are also ongoing maintenance and staff costs, hidden costs like the energy to power and cool the equipment or the cost of real estate within the office.

Costs: Capex vs Opex

Only once the business understands the complete costs involved can a decision be made between Capex and Opex – whether to choose the on-premise infrastructure that requires Capex, or a cloud service provider that requires Opex.

Conventional wisdom suggests that Opex is preferred for IT systems where possible because it’s usually cheaper. UC Berkeley Reliable Adaptive Distributive Systems Laboratory (RAD Lab) estimates that cloud providers have lower costs by 75 to 80 per cent compared with internal data centres.[1] So it may be true that a cloud-based solution is less expensive than an on-premise; however, there are other things to consider when it comes to deciding between Capex and Opex.

Purchasing hardware and infrastructure via Capex means the business owns the asset. The business may amortise and depreciate the asset for taxation purposes, and then extract value from it after its useful life by selling it (either whole or for parts). With careful maintenance, plenty of IT hardware continues to run without issue until well after its anticipated lifespan.

Owning the asset also means the business is stuck with it, even if something better or more useful comes along, which can be frustrating for businesses that want to leverage new and emerging technologies.

By contrast, an Opex model means that the business doesn’t own the asset – but is also not locked into hardware that may quickly become obsolete. By choosing a cloud approach, the business can get access to the latest technology without necessarily incurring higher costs.

Therefore, the Opex model means companies pay only for the capacity they use, which can be invaluable for organisations that experience spikes and lulls in demand. Instead of paying upfront for storage or computing power that may sit idle for days, weeks, or even months at a time, the business can pay less when demand is low and then ramp up when needed.

Summary: Capex vs Opex

The final decision of whether to choose Capex or Opex for IT needs depends on the company’s requirements and budget. With both payment methods having pros and cons, it makes more sense for businesses to decide on cloud versus on-premise solutions based on efficiency and agility, rather than cost alone.

[1] “Above the Clouds: A Berkeley View of Cloud Computing” by Michael Armbrust, Armando Fox, Rean Griffith, Anthony D. Joseph, Randy Katz, Andy Konwinski, Gunho Lee, David Patterson, Ariel Rabkin, Ion Stoica, and Matei Zaharia. Technical Report EECS-2009-28, EECS Department, University of California, Berkeley. http://d1smfj0g31qzek.cloudfront.net/abovetheclouds.pdf

 

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