A recent study has found that OpEx users save 75-80% of their IT budgets compared to their CapEx counterparts. Let’s take a closer look at how OpEx solutions can benefit your business.
The Cost of CapEx and OpEx
When procuring IT equipment, most organisations tend to look at two options: CapEx and OpEx. But what’s the difference?
When you pay for all your assets at once, we bookmark them as capital expenditures, or CapEx for short. Although CapEx include a high upfront cost, they are only incurred once in the assets lifetime. But what is the significance of CapEx in your budget?
In a nutshell, we can say that it reflects how much a business is spending to invest in its future. Naturally, CapEx can vary considerably from year to year, meaning that the costs of capital expenditures ought to be considered over a longer period of time.
What is the appropriate capital expenditure?
Well, it depends on your industry.
Some industries, such as construction, necessitate a lot of capital investment. Others, such as for example retail, do not require the same amount. It can be easier to understand CapEx costs when compared to the costs of someone in the same industry.
On-premise IT infrastructure is universally known for demanding a huge upfront cost. And unsurprisingly, these major costs can seem daunting to most organisations operating within a slim budget. Luckily, there are plenty of OpEx solutions on the market.
If you decide to outsource your technology needs to a third-party hosting provider, you will incur monthly fees at a much lower cost. This option is what we regard as OpEx, or Operating Expenditures. Many organisations, especially SMEs, find OpEx to be a much better solution as it causes only a minimal impact on the cash flow. If you’re still struggling to keep the two apart, there’s a good introduction to CapEx vs OpEx here.
Which Solution Is Right For You?
How can you accurately decide which service will be right for your organisation? And how can you actually compare the costs?
Firstly, it’s important to realize that there are obvious pros and cons to both options.
OpEx is favoured by many UK organisations because it avoids making a negative impact on the cash flow. Instead, you will face monthly payments that are necessary to ensure that your organisation runs smoothly on a daily basis.
Compared to OpEx, you’ll find that CapEx solutions can bring plenty of benefits to the accounting side of your business. If the asset’s useful life extends beyond a year – which it in most cases will – the cost will be expensed using depreciation. The obvious downside of CapEx is, of course, that the more money out towards CapEx will mean less cash flow for the rest of your business, something which can be a serious hindrance to SMEs.
The Hidden Costs of CapEx
In 2017, Gartner predicted that worldwide IT spending would reach a whopping total of $3.5 trillion by the end of the year. This is a development that shows no sign of slowing down. In other words, IT spending is big business these days, and you need to put some serious consideration into what might be the most beneficial solution for you and your organisation.
An important part of this is to consider the hidden costs of CapEx solutions.
There’s recently been some widespread confusion regarding the costs of CapEx. Quite a few industry voices seem to be of the opinion that most OpEx solutions will work out more costly than acquiring something as CapEx. Are they right?
Well, not really.
You see, their calculations are rather misleading. In fact, comparing the monthly cost of a server against the price of a hardware is simple-minded at best, because it ignores an array of both direct and indirect costs.
What you need to remember about CapEx is that the upfront cost is never the full cost of hardware. Let’s break down the costs together:
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Procurement Costs:
You cannot buy a server without considering the initial procurement costs. This includes the cost of the item, the transport and the set-up. You also need to consider the cost of your IT team who are training your employees on how to successfully use the server.
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Direct Costs:
These are the costs that accompany any self-running server, and they include everything from power, storage, floor space and all the operations related to managing these resources on a daily basis. In addition, you will also need to pay licensing fees.
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Indirect Costs:
A server needs to be connected to a network, and this again adds an extra cost. You will also need storage infrastructure, and an IT team to maintain and look after your resource.
These costs might seem like peanuts on paper, but in reality they will start adding up. We often see that an especially unexpected cost, is hosting your own infrastructure. This is something that can require significant capital investment in real estate, and in major cities, such as London where space is limited and far from budget-friendly, the costs of hosting your own data server can be frightening.
OpEx – A Great Option For Many Organisations
At some point, your organisation will have to face a choice between acquiring IT equipment as either CapEx or OpEx. And facing this decision, an increasingly high number of organisations are now leaning towards an OpEx solution.
Using OpEx procurement to obtain major IT equipment can bring plenty of benefits to your organisation. In fact, UC Berkeley recently published a paper on cloud computing, titled Above The Cloud: A Berkeley View of Cloud Computing, in which the researchers estimate that the average cloud users experience lower costs by 75-80% compared to their CapEx counterparts. That is a massive percentage to consider.
Nowadays, software solutions are both nimbler and more cost-effective than ever before. Instead of purchasing costly licenses in a CapEx model, the current trends are pointing towards SaaS options that require small, monthly subscriptions and that run via internet connections. With low monthly costs, SaaS solutions can streamline business cash flow over time – without forcing you into a long-term commitment. If you find a solution that doesn’t really fit your requirements, you can easily cancel and switch to one that will be better suited for your needs.
Additionally, most OpEx solutions are wildly transparent, letting companies pay only for the power and services they need. Their capability of scaling is impressive: if you need a large number of users for only a few months time or you suddenly need to scale quickly to meet a sudden demand, a SaaS provider will let you grow almost instantly. There is a high value in the scalability that is being offered by SaaS-providers. With a cloud service, you can easily grow your consumption over a short period of time – and then effortlessly scale back down again when the extra power is no longer needed.
This is a flexibility you will never see in a CapEx solution.
More recently, providers such as Microsoft Azure, Amazon Web Services and Google’s G Suite, have implemented PAYG pricing. However, they are not doing this on a monthly basis – rather, they are offering their payments on an hourly basis. And, rather impressively, Microsoft Azure actually does it based on a minute-by-minute usage.
At the end of the day, pricing really is one of the best advantages of OpEx solutions.