Traditionally, IT expenses have fallen under the umbrella of capital expenses, often abbreviated within the finance and accounting industries as CapEx expenses. With the advent of cloud computing, the ‘as a Service’ model of buying software, enterprise cloud storage, and related trends in IT, many organizations are successfully shifting some or all IT expenses to the operational expense ledger, similarly abbreviated as OpEx. There are many differences in CapEx and OpEx, and it’s important to understand these differences whether in accounting or an IT pro.
If you’re an IT pro, you might not be as familiar with these terms as your counterparts in accounting. By understanding these terms, you can better approach the C-suite and the CFO or finance manager with the concept, which often leads to easier approval for the expenses you need. It’s an excellent way to get more for less in an era in which businesses are loathe to spend more on IT, but are depending more on technology than ever before. Whether your goal is to obtain more storage capacity, add more IT services, or simply to obtain one of the great aaS software packages available, shifting IT expenses to OpEx has several distinct advantages.
Differences in CapEx & OpEx: Understanding IT as a Capital Expense
Capital expenses are usually considered investments. Business examples include buying properties or building facilities. IT examples include considerable hardware and software purchases, such as servers, computers, or a large software system.
A CapEx, or capital expenditure, is a capital expense. To finance gurus, this means you’re purchasing something of value, which is defined as an asset. Capital expenses are typically relatively larger than the average operational expense, which we will discuss in a moment. Capital expenses are usually bought with a single lump payment, perhaps followed by an ongoing maintenance agreement. For instance, you might purchase a mainframe computer and ongoing upgrades and service packages. Or, you might buy a large software system and pay for ongoing maintenance and service. Servers and other hardware have traditionally been purchased this way, as well.
CapEx vs OpEx: Understanding IT as an Operational Expense
An OpEx, or operational expenditure, is an ongoing cost that recurs regularly, usually on a monthly basis. It is generally provided under a contract by the service provider. Examples of operational expenses are utility bills. These costs are generally lower, but, they recur regularly on an ongoing basis. Enterprise cloud storage and aaS products are IT-related examples of operational expenses.
From the IT manager’s perspective, the advantages of buying products and services under the OpEx model include the fact that it’s cheaper. It’s usually easier to get approval for several thousand dollars per month than it is to get the okay to spend several hundred thousand dollars at once. Additionally, there isn’t any investment past what you need.
For instance, buying a few dozen servers for a temporary development project wouldn’t make sense, because there might be no need for the hardware after the project is completed. Conversely, it’s well worth taking on an enterprise cloud storage environment for a few months that can be easily cancelled once the development project is finished.
The Business Advantages of Shifting IT to OpEx
An excellent example of IT as an OpEx is ‘aaS’. Storage as a service, software as a service, etc. allow IT to get more products and services while spending less.
Also, with an operational expense, what you’re getting is extremely transparent. We used X amount of storage this month and paid X amount for it. With capital expenses, it’s sometimes extremely difficult for the IT manager to explain exactly how the company benefitted directly and indirectly from a $500,000 purchase. In an age where ROI is everything, this makes life for the CIO or IT manager a lot easier.
The OpEx method of handling IT expenses makes sense for the business, as well. It’s much easier to take advantage of certain tax incentives, and there is no complex product depreciation over time. You got X and you paid X. It’s that simple. Handling IT expenses as OpEx also allows for much easier growth. If a product line happens to take off suddenly, IT can spin up additional enterprise cloud storage quickly and efficiently. There’s no more waiting around for approval, conducting a lengthy quest for the right vendor, and then entering a negotiation and implementation process. A few keyboard clicks and bam! You’ve got what you need.
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