CapEx vs. OpEx of Cloud Computing

What is CapEx?

Capital expenditures (CapEx) refers to long-term business investments expected to be utilized for multiple years. It’s expected that CapEx will continue to benefit the business in the future and eventually pay for itself. Maintenance increases the life and utility of a CapEx item is therefore also a capital expenditure. Examples of CapEx items include printers, land, and generators.

What is OpEx?

Operating expenditures (OpEx) are incurred in the day-to-day operation of a business, and generally include services or items expected to be used within a year. This also includes subscriptions, such as SaaS, or other services billed on a flexible or scheduled cadence. While operating expenditures are no less important than capital expenditures, they are not considered long-term investments.

Costs of CapEx vs. OpEx in IT

A typical on-premise IT infrastructure generally requires significant CapEx including hardware, equipment, and maintenance. The upfront costs are predictable, but the lifetime of CapEx items and total maintenance costs are uncertain. On the other hand, a cloud environment on a platform like Microsoft Azure operates on an OpEx model where a company only pays for what it needs at the specific point in time, on a monthly basis. Risks are lower and no equipment maintenance is required.

Scaling CapEx vs. OpEx

One risk of CapEx investments – particularly IT investments – is that they may become outdated or even obsolete before they have paid for themselves. Cloud platforms like Microsoft Azure eliminate this risk. Technology is constantly improving and evolving, and it is imperative for a company’s IT infrastructure to grow with its business.

Another issue of CapEx in IT is its inherent inflexibility. You may end up paying for capacity your business does not require in the future, or in the future end up in the painstaking and expensive process of increasing capacity. The OpEx model of cloud computing offers companies significantly more flexibility and agility. Microsoft Azure scales up or down to meet your specific capacity needs and budget. Deployment and lead-time are also much shorter with the OpEx cloud approach.

ROI of CapEx vs. OpEx

Because CapEx items are utilized over the course of multiple years, they are accounted for differently than operating expenses. The annual cost of a capital expenditure is calculated by amortizing or depreciating it over the expected life of the item, rather than deducting the total investment in one tax year. It is often difficult to determine the exact value and cost of CapEx items to a company, and a bit of a headache for your finance or accounting department.

OpEx items are typically more straightforward from an accounting perspective and are usually tax-deductible. Operating expenditures are simply subtracted from the company’s revenue to calculate profit, which reflects costs more accurately than depreciating CapEx investments. The way OpEx costs are accounted often increases profit margin. The value of OpEx items to a business and their ROI are significantly clearer to attribute than those of CapEx items.

Which is better?

Many IT investments offer options to be purchased as either CapEx or OpEx models – such as software licenses vs. SaaS, or traditional infrastructures vs. IaaS. The right option for you depends on the company’s needs, priorities, and goals.

 

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