There is little debate that there are big advantages with cost savings when moving to the cloud. And when it comes to cloud ROI, comparing capital expenses (CapEx) to operational expenses (OpEx) reveals the cloud is a great way to switch IT spending to a pay-as-you-go model and reduce CapEx costs, as well as reap other benefits.
Traditionally, companies relied on in-house models for data centers that required a huge CapEx investment as they purchased space, equipment, software, and a workforce to run and maintain everything. These companies were assured of secure data monitoring and security, but at what cost? Today companies still need the same tight security and oversight, but also more flexibility and more cost-effective solutions. The answer is the Cloud.
If you aren’t sure if cloud solutions will be beneficial to your business, this post will detail what you need to know about CapEx vs. OpEx of cloud computing and the financial ramifications of each. We’ll show you an honest comparison of each option and how you can get started with putting the cloud to work for your business.
Let’s get started…
CapEx and OpEx
If you’re looking to make changes in your business’s IT capabilities and equipment, you have two financial models to choose from: capital expenditure (CapEx) or operating expenditure (OpEx). These models aren’t unique to IT; they apply to business expenses universally. But with so many new approaches available for handling companies’ IT needs, it’s important to review how these types of expenses should be considered when assessing solutions for your business.
Let’s explore the differences between CapEx and OpEx and how they apply to IT expenditures.
CapEx and OpEx defined
CapEx is defined as business expenses incurred in order to create long-term benefits in the future, such as purchasing fixed assets like a building or equipment. Some examples of IT items that fall under this category would be whole systems and servers, printers and scanners, or air conditioners and generators. You buy these items once and they benefit your business for many, many years. Maintenance of such items is also considered CapEx, as it extends their lifetime and usefulness.
OpEx is your operating costs, the expenses to run day-to-day business, like services and consumable items that get used up and are paid for according to use. This includes printer cartridges and paper, electricity, and even yearly services like website hosting or domain registrations. These things are necessary for your business’s success but are not considered major long-term investments like CapEx items.
Accounting differences between CapEx and OpEx
Today many IT goods can be acquired as either a CapEx or OpEx, giving businesses more options to work with. For example, software can be bought outright for indefinite use as a capital item or purchased as a monthly subscription. It all depends on what fits your financial goals best because capital expenditures and operational expenditures are treated differently when it comes to taxes and accounting and will affect the overall value of a purchase in the long-term view of your business.
For example, CapEx costs are considered an investment. Buying a long-term need all at once assumes the item has great value and will eventually pay for itself as it benefits the company over time. However, since a CapEx item will be used over the course of many years, it must either be amortized or depreciated over its lifetime, rather than deducted in one tax year, for accounting purposes. So, while a great investment for a business, capital expenditures can sometimes be an accounting headache and more difficult to pinpoint their actual cost and value to a company.
Capital expenditures also require further investments to maintain and keep operational and will eventually have to be replaced, requiring yet another investment. In the meantime, and especially in the IT field, you run the risk of this item becoming outdated or outgrown before it has paid for itself.
"So, while a great investment for a business, capital expenditures can sometimes be an accounting headache and more difficult to pinpoint their actual cost and value to a company."
OpEx items, on the other hand, are fully tax deductible and are subtracted from your revenue when calculating your profits and loss. Generally, this increases your profit margin. Operational expenditures also more accurately reflect the cost of doing business because their benefits and value are immediate and easily recognized. You buy them, use them, and benefit from them very quickly and visibly.
The drawback of OpEx expenses is that these purchases don’t necessarily pay for themselves and are a notorious cause of business debt, but if your operational expenditure is too high, you can quickly cut back on spending. You can also switch to a different product more easily if something isn’t working out for you since you didn’t invest much in the first place.
OpEx, CapEx, and the Cloud
The financial differences of OpEx versus CapEx when adopting cloud services will affect the cloud set up you choose. If you want to avoid the difficulties of a capital expenditure, you will probably opt for public cloud services that use a pay as you go model. If you want total control of cloud services within your company, you can task your in-house IT team with setting up a private cloud where your organization is totally responsible for its services (and costs).
A third option combines resources from both private and public clouds to create a hybrid cloud when your organization buys a public cloud and makes your IT team responsible for it. This option offers the most flexibility for controlling costs.
For most businesses, however, a pay-as-you-go plan for cloud services is probably the obvious solution. This kind of setup lets the experts run and maintain the cloud, so you don’t have to hire new employees to do it and existing employees can focus on their usual tasks. This option also keeps your financial forecasts stable and predictable. Overall, keeping your IT efforts as OpEx as possible is the new and more flexible approach to keeping those expenses down.
CapEx or OpEx–Which Is Cheaper?
With everything in business, the ultimate question is always, “What’s the bottom line here? What is this going to cost us?”
You know how important the integrity of your data and IT systems are to the function of your business, but you can’t go overboard on your IT budget either. You need your IT expenditures to work for you and help you meet your business goals. That is why it’s so important to review your options for making your IT expenses CapEx or OpEx and determine which benefits your finances most. How can you get the best IT infrastructure for your business at the lowest cost to you?
CapEx stability or OpEx flexibility
The primary benefit of a CapEx model is stability: You know exactly what your costs are, at least on an annual basis, if not a longer timeline. But that cost comes with unpredictable results attached to it. Your initial cost and how it will depreciate or be amortized over time is a certainty, but the true value of that investment to your company each subsequent year is yet to be determined.
So, is this certainty worth it or is it a waste? Here are some things you risk when you take a CapEx approach to IT spending:
- Buying capacity you don’t need today to meet tomorrow’s uncertainties. In the IT world, technology is always changing. An upfront push into establishing your own cloud might seem like an investment, but what if the equipment and skills of the workforce you invest in become irrelevant before your investment pays off?
- Getting stuck with capacity you don’t need. If you overshoot on everything needed to set up a private cloud service and your need for private cloud services doesn’t grow fast enough, you lose money on wasted goods and work.
- Entering vendor contracts that create business dependencies you can’t break. Being held hostage by those contracts. Being left high and dry when the vendor doesn’t follow through.
- Paying staff to watch over these assets and “keep the lights on,” when they could be contributing to better products and processes. Either you’re taking staff from what they were originally hired to do or paying additional staff. Either way, profits are at risk.
- Locking into long-term approaches to your IT needs, limiting your ability to adopt newer, better ways. Like we’ve said before, technology changes fast these days and you don’t want to be lagging behind just because you spent so much money on a prematurely aging setup.
- Taking a very long time, usually through a difficult process, to adopt new capacity. Time is money. The longer a setup takes, the more money you lose.
- Letting your equipment dictate your business approach, rather than your business needs driving your IT infrastructure. You sacrifice agility when you invest a lot of time, money, and manpower into a CapEx expense and can’t bear to change after investing all those resources. This is a guaranteed way for your business to become irrelevant.
The OpEx model, on the other hand, addresses all these needs.
- Purchasing IT resources and services as OpEx costs make each purchase less permanent and reduces a lot of risk. If a vendor fails to meet your expectations, if technology leaps ahead, if your business identifies new markets, or if your IT budget fluctuates, you aren’t locked into one IT infrastructure that you spent a lot of resources on.
- By freeing you from basic network and equipment maintenance, your people can apply their talents to improving your products and increasing sales for higher profits.
- Because these services are provided instantly and on demand, your lead times for deploying new and improved products shorten to days and hours, versus years and months, again increasing profits.
- If an architecture or service turns out to be misconfigured, you can quickly and easily reconfigure it. If a project or program turns out to be a dud, you’re not stuck carrying infrastructure dead weight; just delete it. Minimal money wasted.
- The OpEx approach to IT expenditure gives modern businesses the agility and flexibility they need to stay relevant in ever-changing markets and meet their clients’ needs more successfully and quickly. And better products and better services delivered means higher profits for your company.
- A more flexible approach to IT infrastructures like pay-as-you-go cloud services and other IT operational expenditures allows your business to keep up with the competition by paying for only what you need when you need it, so you don’t get stuck with a huge bill for outdated infrastructure.
"The OpEx approach to IT expenditure gives modern businesses the agility and flexibility they need to stay relevant in ever-changing markets and meet their clients’ needs more successfully and quickly."
OpEx Services Complement a World Preparing for the Cloud
Flexibility and agility are the keys to why OpEx resources are so vital in the IT world. They’re not only a fiscally good idea but they also solve many problems that the traditional approach of investing in your own private infrastructure struggled with in the past – problems also solved by cloud solutions.
Let’s look at some of the benefits of operational expenditures in the context of intangible IT goods, such as cloud services.
Benefits of OpEx IT expenses
The main benefits of IT OpEx are cost-savings for your business and the ability to quickly change directions to meet market demands. But IT OpEx on intangibles like cloud services does this in a variety of ways.
First of all, with operational expenditures, you buy on an as-needed basis, so you are never making an investment in something that can’t be used profitably immediately. You also aren’t guessing that you will need it. You know you need it, so you get it and you use it. There are no uncertainties attached.
You also won’t find yourself stuck with capacity you don’t need. You won’t have unused equipment or over-complicated systems that your business just never grew into needing and therefore wasted money on.
OpEx purchases typically do not require strict, long-term business contracts. With pay-as-you-go cloud services, a subscription or service term usually isn’t more than a year and the contract terms aren’t very stringent. If a vendor fails to satisfy your expectations, it’s easy to break with them and sign on with someone new.
Because OpEx services are not owned by your company, you are not responsible for keeping them up and running. You are paying a vendor who is responsible for ensuring service is always available and functional. This means you are never distracting your own workforce from the duties they were hired for in order to maintain your infrastructure, and they can continue making you money with their specialized skills.
Due to the consumable nature of operational expenditures, they do not require you to lock into long-term approaches for your IT needs. You are free to adopt new and improved plans as necessary, allowing you to stay up-to-date on market strategies and the technology you need to keep up with the competition.
OpEx purchases are quick deliverables, meaning you never have to waste time (and therefore money) coordinating a whole new IT setup. You don’t have to arrange for space, equipment, or manpower. The vendor has all of that on their side so all you have to do is sign up for and receive service.
You don’t own the elements of an OpEx infrastructure, so you are never forced to strategize according to what you already have. You did not invest a lot of capital on the setup that you are using, so you don’t have to feel beholden to it. You are free to adapt your IT capabilities according to your business goals, rather than your business goals to static IT capabilities.
If you haven’t deduced it already, all of these benefits related to procuring IT services as OpEx expenses guarantee your business a degree of flexibility and agility unobtainable until recently. And as you know, in the fast-paced world of business, the more easily and speedily you can respond to changing market trends, the better you can meet your customers’ needs and grow your profits and overall value.
Pricing and flexibility related to OpEx and the Cloud
Most Cloud services are priced by usage; the more you use, the more you pay. You don’t pay for what you don’t use.
Cloud services are also often priced by service level. Just as a steak dinner costs more than a fast-food hamburger combo, your IT needs may be premium or basic.
You might need one steak dinner to sate your appetite. Or, maybe one hamburger combo (or several hamburger combos that are still less expensive than one steak dinner) will do the trick. It all depends on your flexibility.
Cloud providers recognize this, and they tend to have services priced according to how robust they are, on top of how much you use them.
The quality and flexibility model of Cloud services is important for businesses like yours who are looking for vendors who aren’t going to just offer a service you can use, but one that will be in line with the up and down cycles of your business and really perform for you when you need it most.
Before, when data storage was a CapEx investment of space, hardware, software, maintenance, and manpower, companies may have bought and valued everything with the lifespan of each item in mind. But today, the value of increasingly intangible assets like the Cloud is often found in their flexibility.
Vendors know that companies are moving towards OpEx IT infrastructures and that they aren’t willing to invest in long-term tangible products. So, they are increasingly valuing and pricing their cloud and other IT products and services based on consumption and, often, tier of service, knowing the expiration date of what they’re offering is insignificant.
In IT, having the newest and most on-trend technology is important and the cloud model makes this easier. But the true advantage of usage pricing (vs. a fixed fee model) is the flexibility it brings. You can better manage the model and quickly scale up or scale down a configuration based on need.
Review of CapEx Versus OpEx
We’ve discussed a lot of considerations when it comes to the cost efficiency of investing in your IT infrastructure, and there’s still a lot more we could say about the many benefits of choosing the right model for those expenditures. But to make it easier on you, here is a comparison chart that breaks down the important differences between capital and operational IT expenditures, so you have a quick reference while we continue our discussion.
Preparing for the Cloud World
Cloud solutions are gaining traction across the board because of their ease, low cost, and comprehensive services. More and more companies are discarding their old, clunky IT infrastructures for the more nimble Cloud. This trend fits with a general movement towards businesses gaining value through intangible assets and the OpEx pay-as-you-go model for services.
In the digital age, more and more assets have become intangible. That is to say, where before businesses invested in physical locations, equipment, materials, and supplies to function, today an increasing number of startups and big-name companies have surprisingly few physical assets to their name and rather build value with ideas and information, intellectual property, and branding.
Many factors are driving the recognition of value in intangibles, and technological change—embodied by big data, mobile, and the cloud—is a major component for companies to consider. This acceleration of value of intangibles is being driven by the sweeping change of digital transformation across all industries and is forcing companies to reevaluate everything, including:
- the way products are designed, produced, and delivered
- internal operations and organization
- IT infrastructure and processes
- (most significantly) customer relationships
The variety of benefits that come from cloud solutions make it a major intangible asset to any business. We’ve already discussed how cloud services are readily available as OpEx expenses, saving you money and offering flexibility to purchase, implement, and profit from those services with little to no downtime or risk. But we haven’t really highlighted the advantages of the cloud itself for any type of business.
Benefits of the Cloud
It’s hard to find something that cloud computing can’t offer a business. Its environment is ideal for customization and implementation of any platform and application you need to run your business, serve your customers, help your employees, and more. We could create a whole other guide on just the cloud and we encourage you to further explore our site and services to learn more about what the cloud can specifically do for you. In the meantime, however, here is a quick rundown of cloud benefits.
The cloud provides, among other things,
- flexibility to scale and adapt services to match your ever-changing goals and needs
- accessibility everywhere and any time, as long as you have an internet connection
- global collaboration
- efficiency, as there is little to no lead time for getting applications to market and few logistics to coordinate
- competitive advantage as a quick resource for the most innovative technology available
- data security and IT infrastructure managed by an outside vendor rather than your own workforce
- savings on hardware and equipment
- cost-effective pay-as-you-go structure,
- regular updates and access to up-to-date technology
- a competitive edge over competitors who must still devote resources to managing their IT infrastructure
The uses of the cloud are countless and unique for each organization, but for companies looking to stretch their IT budgets and grow their business, the competitive advantages of entering the cloud world are undeniable. This is where business as a whole is moving to and no one can deny the incredible advantages rolled up into the single intangible asset of the cloud.
What We’ve Found
The benefits you get from the cloud and the OpEx IT purchasing model, and the public cloud paradigm, enable significant business benefits – if you’re ready and able to capture them.
We’ve found that not all these benefits are easily measured in dollars and cents. They answer to a different bottom line: The ability to compete in the modern IT workspace.
We’ve talked a lot about how the investment upfront model of CapEx doesn’t always work well for IT budgets, but that doesn’t mean you shouldn’t make any investment in your IT capabilities. Instead, you should be investing in strategy and innovative ideas, the hallmarks of a cloud world.
Consider this: Using your current assets, can your team quickly adopt the newest and best methods for serving your IT needs?
- Does your hardware allow you to scale your services to real-world demand? And are you buying more than you need, based on a crystal ball?
- Does your infrastructure allow you to experiment, learn and adapt, with no sunk costs?
- How much do you really pay for your IT services, beyond hardware purchases and data center leases?
- If you could deploy new infrastructure and services in a matter of hours or days, instead of months or years, what could you achieve?
- If your team is always firefighting, how long before the fire gets the better of them?
If you do not have these capabilities yet, it’s time to position yourself for the new reality and future of the business world. It’s no longer enough to make a large investment upfront and wait to see how it works for you.
Harness the power of the cloud with 10th Magnitude
As a Microsoft Azure Expert Managed Service Provider (MSP), 10th Magnitude has been in the cloud since our conception, and we’ve seen the cost advantages it’s had for businesses like yours. Here are some additional points we want to make about the savings of joining the cloud and how we can help you make the migration.
Get a custom comparison of your IT OpEx and CapEx
It’s difficult to make a direct comparison between the traditional CapEx model most IT organizations use for hardware and the OpEx model of paying for virtual machines on an hourly basis. However, there are some benefits we can include into an ROI estimate for Azure cloud services:
- Elimination of on-premises data center power and HVAC costs
- Reduction of physical plant expenses (lease, security, insurance, etc.)
- Reduction of maintenance and utility service licensing (e.g., Solarwinds licensing)
There are also more esoteric savings that are hard to quantify, such as:
- Re-alignment of staffing efforts from “keeping the lights on” to improving systems and operations
- Flexibility to increase, decrease or reconfigure inventory as business needs fluctuate (no underutilized hardware or emergency hardware purchases)
- Simplified and automated processes for infrastructure adoption and change management that
- increase operational tempo,
- reduce lead times and
- reduce configuration and deployment errors
- Ability to scale to demand automatically or on a schedule (no more over-provisioning resources to deal with occasional demand peaks)
- Ability to make future use of Platform as a Service “PaaS” services to reduce operational overhead
At 10th Magnitude, we can help you make a dollars-and-cents comparison of the models specific to your business. If you are able to share certain financials with us, we can help you determine what cloud services are right for you. If you’re ready to discuss how to make Microsoft Azure work for you, contact us and we’ll get you the information you need.
Let us take care of your cloud solution needs
When you join the cloud with 10th Magnitude, you’ll receive the resources and support you need to make the cloud work for your business and make the digital transformation you need to stay competitive. Here’s a peek at what you can expect from 10M.
Our Managed Services offering provides one-stop shopping for operational and management support, including:
- Self-service portals for the provisioning and management of resources
- Single-pane-of-glass insights to all Azure operations
- Turnkey patch management
- Automated right-sizing and cost management features, including chargeback reporting
- Fully automated monitoring and reporting, including 24/7/365 incident response
- Ability to leverage Microsoft’s Premier Support for immediate top-tier technical support
Azure’s built-in support expects you to conduct all maintenance and operations for IaaS. If things are on fire, the default support is weak (forum-based, long lead times); speedier service is expensive. With 10M, you don’t have to worry about any of that. Our team of Azure experts knows how to keep your Azure applications up and running so you or your customers never experience any downtime.
The Microsoft Trust Center asserts underlying Azure service compliance with pretty much every government or professional audit standard that is articulated in writing.
Azure also provides some turnkey security features as a no-additional-cost, baseline service, such as DDoS detection and remediation. The Trust Center describes these features.
Our Managed Services offering includes turnkey monitoring and management of security profiles, remediation, and events. Our partnership with Alert Logic allows us to implement very granular security auditing, interception, and remediation profiles that can be customized to specific needs.
Built into Azure at no additional cost is the Security Center, which provides threat assessment and recommendations, which we would use as part of any migration. It has additional pay-per-instance features, such as just-in-time VM access.
Join us in the cloud
By adopting the cloud and Azure services for your IT infrastructure needs, you open your business to new agility that allows you to take action on anything the market throws at you. The communication, security, storage, customization, and agility of cloud computing enable your business to do whatever it needs to meet your goals and stay relevant and fresh no matter how your market changes. This kind of competitive edge complements other business trends like tiered pricing, intangible assets, and OpEx expenses in a comprehensive package of flexibility that allows a company to be an industry leader and disrupter.
The cloud computing cost advantage is clear—it saves money and it helps you make money. By adopting OpEx IT services and goods you cut out wasted capabilities, time, and resources better spent on your own products and services.
But more importantly, the cloud gives you a competitive advantage that allows you to do anything you want to do in your business. If you want to slash budgets and raise profits, cloud solutions give you the tools to do that. If you want to be cutting-edge and innovative, cloud solutions can help you do that. If you want to improve communication and collaboration capabilities or offer clients top-notch data security or have the freedom to experiment with little risk involved, cloud computing services can allow you to do all of this and more.
If you’re looking to take your business to the next level in the modern business revolution, it isn’t really a question of if you’ll adopt the cloud, but when. And with our team at 10th Magnitude, that when can be now. With our new Managed Services Health Check we can help you determine where you stand with your current IT architecture and security and get you up to date with the latest Azure and cloud services, allowing you to not only focus on what your company does best but truly do it best.
"The cloud cost advantage is clear – it saves money and it helps you make money. By adopting OpEx IT services and goods you cut out wasted capabilities, time, and resources better spent on your own projects and services."