Reasons to Move Your Organization’s Technology From CapEx to OpEx
The cloud has changed the way businesses manage their IT operations. Before the cloud, most companies used the Capital Expense (CapEx) expense method to acquire, maintain or upgrade IT assets. Meaning they had to spend money, use collateral, or take on debt to buy a new IT hardware or software with hopes of getting benefits for longer than a single tax year.
Today, many businesses are still using the CapEx model, but the trend is quickly shifting towards Operating Expenses (OpEx). OpEx expenses are costs incurred during a regular, day-to-day business operation.
You can incur CapEx or OpEx while running your business. For example, if you need additional storage space to keep your data, you can buy new storage hardware as a CapEx or lease a space in a data center as an OpEx.
CapEx is different from OpEx in the sense that CapEx is costs that offer future benefits, while OpEx is costs incurred during your daily business operations. You need to understand these expenses to run your business effectively and efficiently.
An Overview of Capital Expense
CapEx is a one-time purchase that benefits your company for several years. It includes IT infrastructure, asset upgrading costs, buildings, and intangible assets like patents, copyrights, trademarks, etc. With the CapEx model, you:
Own the IT asset fully and customize it to meet your business needs
Have complete control of the IT asset
Get to keep operations in-house
Don’t worry about cloud provider problems like outages or going out of business
But it also has a range of downsides and challenges, like:
Less business cashflow for short-term operations and special projects
Having to stick with an IT asset for years to extend its ROI
Having to estimate future capacity needs for static IT assets is tricky and complex
Expensive IT assets need well-forecast budget estimates and lengthy approval processes that can slow down the purchase of assets
Keeping up with rapid IT and market changes could lead to overspending
Difficulty in scaling downwards or upwards in response to changing market conditions
An Overview of Operating Expense
OpEx refers to regular operational expenditure that supports the business. These typically include costs for contract-based services, software subscriptions, and maintenance, equipment leases, cloud computing subscriptions, etc. OpEx corresponds to current costs, so it doesn’t account for any future benefits to the business. Some of its benefits include:
Buying technology assets with the CapEx spending model gives you the benefit of greater control over those assets. That’s because you pay cash and own the asset outright. However, it comes at a high upfront cost and more accounting throughout the asset’s lifespan. Buying assets also pin you down to a certain capacity level that’s relatively hard to change.
However, OpEx gives you so much more, especially in the ever-changing IT landscape. The OpEx model is simpler, flexible, and potentially more economical. If you want the flexibility of scaling without worrying about cost, you might want to consider OpEx. Here are reasons why many businesses are shifting from CapEx to OpEx:
No Larger Upfront Investment
One of the greatest benefits of OpEx is it negates the need to pay large upfront investments in IT assets that might not attain ROI for years to come. With the OpEx model, you can access specific IT services and solutions for a fixed and predictable monthly or quarterly cost through third parties. Shifting the cost to a managed IT services provider frees up budget dollars, giving your company a chance to gain a competitive edge and even enter new markets.
Supporting Infrastructure Capabilities
With CapEx, you’ll have to buy supporting infrastructure capability, including generators, UPS systems, insurance, maintenance, air conditioning, data centers, redundant power supplies, etc. But when you procure the same capability as an OpEx item under a managed IT service provider, you get all items in a single package. Meaning you pay for the infrastructure along with the hardware in a single monthly or quarterly payment.
IT assets lose value over time. So in a CaPex situation, you’ll have to worry about your assets depreciating or becoming outdated at some point. But this will be the least of your concerns when you go with the OpEx framework. The managed IT service provider will handle all upgrades and maintenance on your behalf, ensuring you stay abreast with your peers.
Shift IT operations to a Managed It Service Provider
When buying IT assets, you’ll be in charge of all IT operations management capabilities, including backups, repairs, and OS upgrades. In the CapEx model, you’ll provide all these capabilities. But in a hosted OpEx model, you can add these items to your contract, so the managed service provider handles them as part of your monthly service.
Access the Latest IT Solutions
With OpEx, you can assess a range of IT assets and services for a regular fee. Reputable managed IT service providers offer different services, including Infrastructure-as-a-service), Device-as-a-Service (DaaS), and Software-as-a-Service (SaaS), giving you the flexibility to choose what you need.
Less Red Tape
The budget approval of the OpEx framework can be faster because of the low monthly cost. As a result, this will reduce the time needed to attain business goals. Regular payments can help streamline your company’s cash flow over time. With no long-term commitment, you can quickly turn off services and switch to new products when the old one stops fitting your needs.
Scale Company’s Infrastructure as Needed
The ever-changing IT landscape needs solutions that can adapt and allow for growth. OpEx model is flexible and doesn’t come with long-term commitment. Meaning you can pick or drop a service according to need, switch to new solutions that match your current business needs, scale your operations downward to upward, etc.
In conclusion, you don’t have to choose between CapEx and OpEx. You can determine the areas that go under CapEx and OpEx. Irrespective of the framework choice, having control and visibility of your infrastructure allows you to make informed decisions for the success of your business. If you need to switch from CapEx to OpEx, we can help. Contact us today to get started.