14.12.2009 10:00Martin Kuppinger

CapEx and OpEx � the latest thing in IT buzzwords
On the economics of Cloud Computings

Talking with IT decision makers these days, it seems that two new terms keep cropping up, namely the abbreviations “CapEx” and “OpEx”. They stand, of course, for “capital expenditures” and “operational expenditures”. Both have been borrowed from economic parlance but are now widely used in IT Speak, too.

Broadly, CapEx is something you want to avoid, while OpEx is something you want to keep under control. To do that, IT people have two available options, one of them simple, the other kind of tricky. The easy one is leasing which means avoiding the need to tie up tight budget in expensive investment schemes. Of course it also means accepting higher operating costs instead, but the money seems to last longer. That’s probably why more and more software vendors are offering leasing options, even though accounting rules in some countries handle leasing payments as CapEx, at least in terms of cash flow.

However, leasing is usually only half-way solution since software costs are just a part of the picture. The additional project costs can run to multiples of the costs involved in investing outright. Besides, most leasing contracts run for a defined period, so in effect they’re just a stretched-out way of investing instead of paying for operational use of defined services.

That’s what makes drawing on external services via Cloud Computing so interesting for companies. Ideally, this would eliminate any projects costs whatsoever, and appropriately flexible licensing models mean that you only pay for the services based on usage. Pre-configured services are simple to use, which means all you have to worry about are operation costs;  OpEx, in fact.

The advantages of this approach are obvious. It gives you better cost control and avoids having to write off long-term investments over lengthy periods. In Germany, for instance, tax laws force you to depreciate investments in even such simple IT products as a flat-screen on a straight-line basis over five years

A heightened awareness of the difference between CapEx and OpEx is one reason why the number of off-the-shelf products being offered either in the form of virtual or physical appliances continues to rise. It is also a reason why many complex infrastructure elements such as solutions for infrastructure management are now being offered as managed services or through the SaaS model (“Software as a Service”). The aim here is to save customers from having to invest heavily in hardware, software and project costs, thus hopefully coaxing them into signing on the dotted line. In effect, the vendor is taking the burden of investment off the customer’s shoulders. However, it also means that some problems aren’t really being solved, but only deferred. After all, leased appliances may lower investment costs, but they still remain CapEx.

Maybe it’s time for a quick realty check. Whether leasing or cloud-based, vendors are still in for the money. In the case of professional IT services, Cloud Computing can help a big service provider achieve efficiency gains and thus economies of scale that will help them lower their bottom line. But customers would be best advised to ask critical questions. Simply reducing CapEx doesn’t always make the biggest business sense.

Besides, more important still is finding ways to make Cloud Computing handle the job instead of doing it yourself. That’s the real reason many companies are thinking long and hard about whether to buy or rent. CIOs are becoming increasingly aware of the difference, and they are coming to realize that Cloud Computing offers a way of reducing capital expenditure for IT by getting out of costly leasing agreements or classic licensing contracts and switching to rental models while achieving as much security and flexibility as possible. Ideally, if the service provider won’t terminate the contract voluntarily, the renter should, thus avoiding the tie-in and inflexibility of leasing.

“OpEx beats CapEx” is the watchword of the day, but pitfalls remain. Not every answer you hear from vendors and service providers is true, both in the case of non-cloud offerings as well as some cloud-based license models being offered today. But time and the force of demand will be on the side of the customer as we go forward in the coming years. It’s up to the supplier side now to come up with the right solutions.

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