How we finance the purchase of new IT infrastructure has never been more discussed than it is now. In the past, capital expenditure (Capex) has been the most common way to facilitate the purchase but, with the proliferation of monthly-based pricing solutions delivered as a service (Cloud, Managed Services, Leasing), purchasing under an operational expenditure model (Opex) is being considered for a number of reasons.
Now, Capex may suit a lot of organisations, especially those in the Public Sector, who have a defined capital budget every year to deliver services to the local population. In the private sector Capex also works well in organisations that do not have the resources to manage the forecasting of the requirements on a month by month basis or have fixed costs over a longer period due to the nature of their business such as applications supporting a manufacturing process.
Private sector businesses may want to be more flexible and invest as and when the business grows to ensure they do not overspend but remain relevant and maintain competitive advantage over the competition. Many young businesses want the best technology but may not necessarily be in the position to finance a large capex spend and this is where Opex is a perfect fit.
There a number of areas to consider when weighing up the pros and cons of each approach such as:
Obtaining approval – Capex and Opex purchases come from different budgets and can have different approval processes. In most cases a Capex purchase has a number of individuals involved in the decision-making process whereas Opex is lower value and requires less individuals to be involved & speeds up purchasing.
Size of Investment – For a Capex purchase, all money must be paid up front whereas an Opex purchase item allows you to pay as you go, on a monthly or quarterly basis. Allowing the business to free up more capital budget for other projects/investment requirements within the business.
Additional Costs – It’s not unusual for the purchase of a storage device, for example, to require new servers, switches, software and installation services. All these things can increase the Capex spend beyond the budget or make it more difficult to purchase everything that’s needed in order to make the project a success. Including all the additional elements into an Opex model makes it much easier to ensure you can procure everything that is needed to create a successful implementation and meet the expectations & requirements of the business.
Buy now or buy later – Sizing for a Capex spend can be difficult as you have to try and predict how the business will perform over the next 3 or 5 years and size the new solution accordingly – essentially buying for future capabilities that you may or, may not, need. A good example of this is retail where the busiest time of year is over the Christmas break and systems will need to be sized for that peak even though it last for a few weeks and the rest of the year the requirements are 50% less, for example. Many Opex models now allow you to scale up and down easily based on monthly demands which removes the need to always have lots of unused resources and ultimately saves the business money.
Control – When purchasing under a Capex model, you own the hardware and have total control over its use, location, support and availability. In certain Opex approaches (Cloud or on premise as a service) you may encounter issues with the service provider such as an outage or limited capabilities in supporting your specific application environment – this can lead to SLA’s being missed and impact your businesses reputation.
Rules/Culture – Lots of organisations have a policy that major investment in IT must be Capex only and others take the opposite approach due to some or all of the points above. In certain situations, the route taken may be controlled by existing company culture or rules.
In summary, both Capex and Opex have their places when it comes to how we finance our investment in technology. In some organisations there is no choice due to the rules, culture or general operations and all of the reasons above (and more) will form the decision to go one way or the other.
One of the great things about having Capex & Opex models available is that it can be a combination of these that are used because no two projects are the same. Some tactical projects may have shorter timescales and strategic projects have longer ones – using Capex for long-term and Opex for short-term. This then creates a hybrid financing model of both Capex & Opex which is what a lot of businesses already do through the use of cloud solutions and on-premise.
This flexibility should enable business to invest, in the right technology- as and when required – as part of an overall strategy for growth.