IT Infrastructure Spending: Capex vs. Opex
Updated: Nov 13, 2020
Goal: To find the balance between upgrading to the best IT for your business and respecting your budget. Regardless of company size or number of IT staff, you’ve got to make technology procurement decisions. In many cases, the employee that understands the IT options is not the one to write the check, creating a gap in the “perceived value” of the investment. The following chart is a high-level comparison of Capex and Opex spending models which highlights value considerations for both tech and finance.
1. Capex – The entire sum must be paid up-front. The asset then depreciates over time, thereby reducing value over its lifespan. Useful for companies that have a lot of cash on hand. Opex – Usually paid in monthly (or annual) installments. Useful for companies with limited capital or those that would like to make multiple investments across the business (as cash is not tied up in one expenditure).
2. Capex – Traditionally, hardware purchases (server/storage) for an on-premise data center are considered capital expenditures. Direct costs (power and space) and indirect costs such as maintenance and personnel are also Capex. While complete control is an advantage of owning the equipment, costs up front can be high. Opex – A Cloud-hosted data center does not involve any major installation or overhead costs; management and maintenance are provided by the IT provider. Some businesses may feel uncomfortable putting their technology and trust in an outside vendor, but the industry expertise and economical value outweigh those concerns.
3. Capex – Owned equipment can sit idle for days or weeks depending on fluctuations in demand. Additionally, some guesswork is involved in the initial buying as future IT needs can be hard to predict. Did you purchase too little, too much, or exactly what you need? Opex – An Opex model allows for more scalability because you only pay for the capacity you actually use. As production requirements change, your IT can be adjusted by the provider to match your needs and growth.
4. Capex – Depending on company size and management structure, approval for a lump-sum technology expense can be a lengthy process. Opex – Integrating IT upgrades into monthly operating expenses might mean easier/faster approval from financial decision-makers as short-term spending is less.
5. Capex – Similar to #3, a business is stuck with hardware once they buy it, despite new IT tools on the market. Some industries, however, may not consider IT early adoption a top priority. Opex – As new features are released, your provider makes continuous updates to your network and systems. This means you’ll never be working with obsolete technology.
Remember the goal: To find the balance between upgrading to the best IT and respecting your budget. You should first analyze your current technologies and identify how you pay for them. Many businesses ultimately choose a hybrid strategy, where some apps move to the Cloud and others are purchased for on-premise. If you need help selecting the right approach, Iserv can provide a free assessment of your environment and offer a professional opinion for moving forward. Our goal is aligned with yours; to deliver strategic modernization and help you maximize ROI.