The Cloud—OpEx vs. CapEx

Having an effective cloud cost management strategy can have a significant impact on your bottom line. When choosing an expense management model, you are bound to come across both capital expenditures and operating expenses along with varying strategies for dealing with both.

Each one has its strengths and weaknesses and has inspired heated debate regarding the proper way to manage the future of IT infrastructure. To make a fully informed decision, you have to understand the differences as well as the costs and benefits associated with both.

OpEx and CapEx—The Major Differences

OpEx (Operational Expenditure)

• Operational expenses are the ongoing expenses incurred for the day-to-day functions of the business to operate.
• Often, working with a third-party vendor for a service such as cloud management or utilizing the cloud for other computational services is more cost effective and efficient than incurring the substantial upfront cost of purchasing equipment and then managing it. In this case, the cost associated with the “rental” or contracted services falls under OpEx.

CapEx (Capital Expenditure)

• Capital expenses are the value of all the company assets intended to generate value to the business over the long term.
• If you determine that purchasing and managing a server would be more cost effective than offloading the upkeep and management to a third party, the cost associated with this purchase would fall under the CapEx model. In other words, the primary differentiator is in the ownership of the asset being utilized.

Under a CapEx model, you own the equipment and therefore have more direct control over the physical assets. This has upsides and downsides, including more flexibility in deployment strategies as well as higher costs to ensure redundancy. On top of the costs associated with redundancy, the depreciation of the assets also has to be factored into the lifecycle management.

With an OpEx model, you may lose a bit of flexibility, depending on the contracted terms negotiated with the vendor. Still, you have the benefit of a much lower upfront cost. Utilizing modern tools to automate and optimize the utilization of remote resources such as a cloud infrastructure or server CPU time can drastically decrease costs. With these automation tools, you maximize the ROI of the services or hardware by incurring only costs that are directly linked with actual use.

Which model is more compatible with the cloud?

Designing and managing a stable server infrastructure with redundancy and the expected processing and bandwidth can be a daunting task. Many managed services providers have already gone through the trial and error to ensure a stable cloud environment. Whether it is the larger players like Microsoft or Amazon with Azure or AWS or one of the many other options, most have adopted a model of charging for the time utilized on the server with total storage capacity factored in. This model enables a business to achieve maximum cost efficiency by paying only for actual usage and uptime.

Though CapEx has its place, with regard to the ROI of cloud-enabled services, it is beginning to lag behind OpEx options. Factoring in the IT labor, maintenance, and additional hardware or services associated with a satisfactory service level can result in a lot more work and cost—both up front and over time.

What are the benefits of switching to the cloud?

One of the primary reasons for  moving to a cloud service over housing your own server is to avoid the upfront costs. Another is the ability to focus on the core business services that your business is working to deliver instead of devoting time and staff toward managing the infrastructure.

There are many factors involved in determining a final calculation for which option is more cost effective, and ultimately it will depend on your unique use case. In the case of OpEx, there is a direct comparison to a rental model, since you are offloading the management to a vendor and then utilizing the service when needed. With this in mind, it is obviously ideal to reduce the usage of the service to minimize costs while maximizing operating efficiency. It is also essential to analyze the setup configurations utilized to ensure you are not over-provisioning resources.

Doing an in-depth analysis of both options and how each aligns with the goals of service delivery and optimal cost management is the first step to understanding which option will best serve you. Even if you decide to utilize cloud infrastructure, a full assessment of how the migration to the cloud will improve operations is a vital prerequisite for success.