OPEX vs. CAPEX: An IT Budget Title Fight
February 8th, 2018 by adminIt’s a conflict as old as time. Two can enter the field of combat, but only one will leave. Actually, that’s an exaggeration. Sorry. But with the rise in cloud computing in recent years, it is a common C-level discussion about IT budgeting. We’re talking, of course, about the debate over whether an OPEX (operational expenses) or CAPEX (capital expenditures) approach is best for your company’s IT spending. That is, whether it makes more sense to operate IT resources for a monthly fee or to purchase them upfront. Perhaps no single issue has more ability to turn your company’s C-level IT strategy meeting into the business version of the Octagon cage than the OPEX vs. CAPEX debate. No doubt it’s super fun to picture executives in three-piece suits throwing armbars and wheel kicks en route to fleshing out the best path forward in their IT spending. But in reality, the conflict comes down to pragmatic business discussions about infrastructure investment and planning. Often these discussions focus too much on which approach will have a greater total impact on the business’s bottom line. And while that’s a valid concern, viewing the issue through this lens alone brings massive potential to miss the forest for the trees. If you’ve ever wanted to tap out of such a discussion and shake your fists to the sky while proclaiming that there “has to be a better way to decide!” then we’ve got good news. There is. Here are a few things to take into account that tell a much more complete story about which approach is appropriate for your specific IT needs.
CAPEX: Predictable Budgeting / Fixed TechnologyOne of the enticing aspects of CAPEX is that approved projects are predictable, if more costly, from an upfront investment perspective. It can be tempting to look at IT spending the same way as spending in other aspects of business operations. However, the inverse is more often true in IT. It's hard to predict your future needs in relation to potential technological advances when purchasing your IT infrastructure outright. It’s also hard to maximize the value of your capital investment before either the equipment becomes obsolete or the company’s needs shift in a way that the equipment cannot pivot to meet. Simply put, once the hardware is purchased, it’s a static asset. You’ve got what you’ve got.
An Example of CAPEX-Based IT SpendingThe most common CAPEX-based IT solutions are up-front investments in infrastructure such as servers and other hardware. Companies will then use these resources for however long it takes to recoup the investment in them. These investments bring with them greater predictability from a spending standpoint, which is often attractive to CFOs when compiling their long-term budget projections.
OPEX: Variable Spending / Flexible ResourcesWith an OPEX approach to IT spending, the equipment maintenance costs of your technology are shifted directly to the provider. This reduction in maintenance, storage and upkeep often frees up resources in ways that can boost productivity and growth. That’s because the funds and hard assets that would have been tied up in a huge upfront CAPEX investment are now available to reallocate into other projects as needed. However, the tradeoff is that usage needs can vary widely from month to month during surges in change and growth. This causes occasional cost spikes in an OPEX approach to IT. The pay-as-you-go model shifts resource decision-making away from outdated projections into a mode where only the services that you need are paid for, with both horizontal and vertical scaling built into the model. Many businesses have unique and non-static needs for their IT. With an OPEX approach, these are easier to meet. This flexibility also amounts to less funding diversion from other projects to pay the large upfront investments CAPEX requires.
An Example of OPEX-Based IT SpendingThe most common OPEX-based IT solutions are various cloud technology applications such as Software as a Service (SaaS) and Infrastructure as a Service (IaaS). 90% of businesses use the cloud in some way. Over half of them use cloud services as their preferred IT solution. By taking advantage of cloud-based software and infrastructure companies trade of up-front CAPEX investments for a monthly flat-rate OPEX approach. This approach brings with it greater scalability and the ability to keep up with current technology trends.
OPEX vs. CAPEX Isn’t an Either/Or Championship Bout ScenarioThe truth is, your IT budget isn’t a title fight. You don’t need to crown a champion (though we’re confident you’d enjoy the belt). There may be aspects of your specific business that favor CAPEX investment, and others that function best with an OPEX approach. They don’t have to duke it out until one submits or is KO’d by the other. The best way to determine your specific needs is to have a qualified managed services provider (MSP) perform a network assessment and compare it with projections about your potential future needs. You can then discuss the potential solutions that fit your company best. Whatever an IT provider ultimately recommends for your business, the decision between OPEX and CAPEX depends on your unique business needs. With a little planning and the right Managed Services partner, you can turn the showdown between OPEX and CAPEX into a partnership that helps your business KO the competition instead.
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