Organizations looking to change their IT structure and move to the cloud have two financial models to choose from: capital expenditure (CapEx) and operating expenditure (OpEx). While these models are not new, how they’re viewed in relation to the cloud adds another dimension when assessing IT solutions.
OpEx, CapEx, and the Cloud
IT purchases have traditionally been categorized as capital expenditures, but cloud computing is shifting IT spend to a pay-as-you-go model. A short summary of the key differences between CapEx and OpEx quickly reveals why:
- CapEx is about buying assets that have a multi-year useful life while OpEx is part of the ongoing costs incurred to run the business.
- CapEx is paid upfront and OpEx is monthly or yearly.
- OpEx is accounted for in the current year, is listed as an operating cost, and is deducted in the current tax year; CapEx is accounted for over its useful life, typically 3-10 years, is listed as depreciated equipment or property, and is deducted over time.
For example, under a CapEx model, a company buys new server hardware and software for its data center with the assumption it will still be useful for a number of years (or at least updateable) but under OpEx companies invest in SaaS (software as a service) and IaaS (infrastructure as a service) models.
How the Cloud Has Altered the Landscape
Cloud technology has come a long way in recent years, with companies enthusiastically embracing the flexibility, agility, and security it offers. But even as cloud services have become similar to other utilities, many organizations say they lack the resources to procure and support cloud implementation.
The question of whether moving to the cloud has advantages over that of on-premises solutions continues to be a challenging one, especially for enterprises conditioned to seeing CapEx as more cost and tax-effective.
IT solutions can be acquired as either an OpEx or CapEx, giving companies more options to work with. Because CapEx and OpEx expenditures are treated differently when it comes to tax time, it’s important to understand how each affects your bottom line. For example, you may want to buy software outright as a capital item or purchase a monthly subscription as an operational one.
Matt Mehler, Vice President of Microsoft Gold Certified Partner, VirtuWorks, says today “companies only want to pay for what they use—period.” He believes adopting the pay-as-you-go OpEx model allows them to not only save on capital expenditures but to take advantage of the expertise and resources cloud hosting experts offer while realizing cost benefits throughout the year.
The Bottom Line
Yes, CapEx offers greater stability, but it also comes with unpredictable results as to the true value of your investment. OpEx, on the other hand, reduces a lot of CapEx risk by, among other things, freeing your organization from basic network and equipment maintenance. The result? Your employees can use their talents to improve your products, increase sales for higher profits, and meet clients’ needs more quickly and successfully.
For companies that want to stay relevant while taking their business to the next level, it’s less about whether to adopt the cloud and more about when (as in now) and how to implement it. VirtuWorks can help you determine where your company stands with its current IT structure and get you up to date with the latest Microsoft Azure services designed to maximize efficiency while reducing infrastructure costs and allowing better collaboration between software development and your actual IT business needs.