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IT Capex in action

Used for the one-time purchase of fixed assets that benefit an organisation beyond the year of purchase (at which point it’s considered an existing asset), a few common examples of Capex in IT settings include:

• Air conditioners
• Computers
• Data centres
• Firewalls
• Generators
• Land for data centre facilities
• Mobile devices
• Network switches
• Physical plants
• Printers
• Routers
• Servers
• Software licenses
• Universal Power Systems

The shift from Capex to Opex

With the explosion of digital solutions – cloud, automation, and ‘as-a-Service’ offerings – the cost model for a multitude of IT products and services that were once considered Capex have now switched code to be classified as Opex. Prime examples include:

• Data storage
• Infrastructure as a Service (IaaS)
• Managed IT services
• Managed security services
• Platform as a Service (PaaS)
• Software as a Service (SaaS)

Instead of depreciating (like Capex items), Opex purchases are recorded in an organisation’s P&L statements and deducted from the bottom line as they are incurred.

The upsides (and downsides) to each

Every company needs to invest to succeed. And understanding the strengths, weaknesses and financial implications of Capex and Opex can offer strategic insight in when to use them and how to deploy them.

Capex offers several benefits to organisations, including:

• Agency: The outright purchase of hardware and software offers total control of how you implement and use it, including the freedom to modify it as your needs or the market changes.
• Certainty: Knowing the exact costs of a Capex purchase – both the initial cost and its depreciation schedule – offers certainty.
• Continuity: Invest in your own equipment and you remove many of the blockers linked with subscription models. Servers are a prime example. You won’t need to deal with license renewals as you would if purchased on an Opex basis.
• The long view: Capex items are investments that fill needs both in the now and the future. All things being equal, they should deliver value for years to come.

On the downside, Capex comes with several risks, including:

• Crimped agility: The longer the commitment, the larger the investment. And these sunken costs – in money, time, and manpower – can create two unintended consequences. The first is to limit your hand in adopting newer, smarter technologies. The second is a reluctance to change course, even when the market demands it, or your competitors change tack.
• Locked in for the long term: Purchasing hardware outright handcuffs you to the maker, which can create complications down the line if it can’t adapt to changing demands, the vendor falls short on their promises, or, in the worst-case scenario, folds entirely.
• Maintenance pains: You’ve bought the assets outright. Now you need the in-house resources to manage them. You could solve that by reallocating existing staff or hiring new staff. But the first fix dilutes the focus on other business-critical issues. And both fixes eat into profits.
• The future arrives fast: In trying to predict future needs, there’s always the risk you’ll buy more capacity than you ultimately use or invest in solutions that age faster than you’d like, making it harder to fully realise a return on your investment.

How about Opex? Here are a few key benefits

• Greater freedom: Purchasing IT services and solutions as Opex tends to carry less risk than Capex. If technology advances (it always does) or the market evolves (it always will), your budget can flex accordingly. And if you’re not satisfied with a particular vendor, you’re free to vote with your wallet and switch to one that better meets your needs.
• Maintenance managed: With the vendor handling most if not all of the network and equipment maintenance, it means your people are free to focus on the initiatives and activities that improve your products and services, lift efficiencies, and increase profits.
• Delivered at pace: On-demand services can smash typical deployment lead times, down from months and years to days or even hours. The result? More productive workers. More satisfied customers.
• Versatility: Things change quickly in business. And one of the key upsides of a subscription model is the ability to reconfigure services and architecture on a dime. And if a project is completed or aborted? You can retire the supporting services and their associated costs.
• Greater budget flex: Pay-as-you-go services and other IT operational expenditures frees up cashflow for other needs.

Maximising capital potency.

In today’s dynamic tech landscape, businesses with an astute understanding of Capex and Opex can maximise the potency of capital, leverage it in ways that boost innovation, productivity, and efficiency, and ultimately create a significant and lasting competitive advantage.

The first step is to gain full visibility on all IT-related costs, both the obvious and the hidden. Only once you understand those costs in totality can you make an informed call on investments – be it on-premise infrastructure that calls for Capex, or a cloud service provider funded through Opex.

As always, the final call will align with your company’s goals, strategy, requirements, and budget. And in an ideal world, shrinking Capex and Opex – without sacrificing availability, usability, output, or service – will always be the shrewdest investment.