1st June 2016
How IT is financed has long been a topic for debate. For many CFO’s and company owners, IT is little more than a cost to be controlled and seldom seen as an asset to the business.
Over the past few years, there is a growing shift in preference towards away from the traditional CapEx model, in favour of choosing an OpEx model where possible. We believe that the ideal scenario for many customers is a combination of both.
This has all been made possible by the growth of cloud technologies. For example, In the case of SaaS applications like Office 365 and Salesforce, the costs are fixed monthly or annual costs, making it very easy to budget for as an operational expense. Other cloud services such as backup and disaster recovery services are typically annual costs, but can be billed bi-annually or even quarterly in some instances.
IT infrastructure needs are becoming less and less predictable. Projects that once required dedicated rack space, skilled employees and lots of time and money can now be fulfilled remotely via the cloud; or by dedicated companies that specialize in a certain area and charge a subscription fee for its service.
Organisations have more options because they can afford the latest and greatest technology without having to find large amounts of funds upfront to pay for it. Instead, they can focus on their core competencies and transition many of their CapEx investments to OpEx spending, freeing up cash for those investments and other projects that drive revenue and growth.
One of the key arguments for the CapEx model was that by purchasing technology solutions you eventually own it, whereas in hosted cloud services, the annual or monthly cost never ends. Many customers had old platforms that just keep working away – with zero or low recurring costs. But those days are rapidly disappearing because on premise solutions require ongoing maintenance charges which gets very expensive over time and the issue of skills shortages for legacy systems is only getting worse.
Other inherent difficulties with capital spending on technology can include:
- Large amounts of cash are required.
- Error-prone guesswork to estimate future capacity needs for hardware/software.
- Lengthy and arduous processes to estimate budget and get it approved.
- Once the technology is purchased, you’re stuck with it – despite technology advancements or changes in company growth.
Technology is an Operating Expense
When companies decide to use cloud services, many additional benefits are immediately felt. They no longer need to dedicate the same staff resources, time and space for the hardware and software that would be required normally. The internal IT staff don’t have another project taking up huge amounts of time and the company is no longer dependent on a few key individuals with specialist skills.
Many processes are automated and standardised, improving efficiencies. Services, features and options can be purchased as needed and used on demand, so companies aren’t paying for features they don’t need.
Capital expenditures are meant for static investments and operating expenses are intended for fluctuating costs, so it only makes sense that rapidly changing technology should be considered as OpEx.
We find more and more that companies are looking to get away from having large capital expenditure amounts depreciating on their balance sheets each year. As the senior IT and finance management roles are having to understand each other’s requirements more – the shift to an OpEx model is helping both IT and finance get what they want. IT gets the latest technology and a standardised, quality certified cutting edge service, whilst finance gets lower capital costs, increased cash flow and much less risk with simpler budgeting.
With so many capabilities in the cloud, companies can have capital expenditures decline as their operating expenses increase, altering the appearance of their balance sheets forever.
Why is OpEx better?
Some of the key benefits of the OpEx Model are:
- Pay only for the capacity you need at the moment and scale up or down as requirements change.
- Speed up and simplify the budgeting process because short-term spending requirements are less.
- You can make multiple investments across the business since capital isn’t tied up in large upfront expenditures.
- You can fund expenses faster through operations rather than needing to borrow money or divert money from other projects to pay for large, upfront technology costs.
- Smooth out cash flows over time.
Hybrid Cloud – CapEx and OpEx combined?
Adopting the Hybrid Cloud model means that there is another option available – those organisations that still like to own the technology they use can have the benefit of the fully managed, hosted cloud service, but have someone else take care of all the technical details.
In this instance, the hosting and associated costs is billed as an OpEx by the service provider, but the customer still owns all the primary hardware and software being used. In these cases, the service provider buys the technology and manages it all as a cloud service, on behalf of the customer.
It all depends on the individual customer and what is right for your business, but now you’ve got choices where there was none before. Good cloud providers can facilitate whatever your buying preferences are, so you get the finance solution that matches your requirements, as well as the IT solution you need.
Lorcan Cunningham is the CTO of Savenet Solutions.