Capex vs. Opex for IT Spending
by July 10, 2017

Filed under: Cloud Computing, Industry Insights

The cloud offers many attractive alternatives for businesses and their IT teams looking for flexibility and quick deployment of all kinds of applications, large and small. But existing budget patterns—with a strong bias toward ownership (capex) rather than consumption-as-needed (opex)—means IT is stuck shopping for tools in an old-school way. Old habits and work styles have left organizations with enlarged capex budget but a much smaller opex budget, even though the reverse makes more sense in a subscription-oriented, SaaS model world. Justifying change can be very challenging.

How can IT justify change and shift to new models and ways of spending? Even though IT is often involved in the very cutting-edge investments that ultimately help organizations to change, grow and adapt, implementing changes within IT itself, and between IT and other departments like finance, can be daunting.

Companies in need of tools to better manage their applications or operations have traditionally thought in terms of simply buying a software package or licensing it for on-premises use. However, in comparison with today’s SaaS options, this approach almost always comes with high costs. It can sometimes limit flexibility in deployment, too, thanks to additional usage or per-user charges.

One of the factors that keeps organizations from embracing web-based alternatives, which are typically less expensive and more flexible, is simply that their existing budget, often wrung with the greatest difficulty from the financial side of the house, is delivered in two categories: capital expenditures (capex) and operational expenditures (opex).

From the days of Big Iron and the proverbial glass house, IT was one of the most capital-intensive activities at most organizations. Initial capex investments were huge, and periodic upgrades could almost be “bet the company” kinds of decisions. Obviously, the world has changed. The swift embrace of the cloud is reshaping economic assumptions and the look and feel of IT. There’s pressure on IT to provide business value, rather than simply spend money. But budget models often have not caught up. Year after year, IT has had to endure cost cutting, but the cuts have often been applied against the assumptions of that capex/opex split.

Financial people, of course, often have their own concerns. One is that opex generally has different tax consequences from capex. Depending on an individual organization’s specific conditions, that can matter a lot.

Making the Case for More Opex

So, how can you make a convincing case for more opex—for strategic modernization—and less capex?

It helps to understand the financial issues your organization faces and the strategies it employs for cash management, long-term investment and more. But you can also have success starting closer to home. Some IT leaders hesitate to push for a shift to opex because, in two ways, it can seem like putting one’s head on the chopping block. First, if you rock the boat, you might risk eroding whatever budget you have. If you suggest that maybe you don’t need so much capex and want some more opex, the finance folks might try to cut both! Then, there is the larger concern that shifting spending may mean committing to new ways of operating. And if something goes wrong with a change that you have committed to so publicly through the budget process, rather than pursuing behind the scenes, who’s going to be blamed?

Fair enough. So, start with a vision of where you want to go. Ask yourself how far you would like your business to go in the cloud and how many functions would you like to get out of the capex cycle. Then pare back that vision a bit and sugarcoat it with lots of careful reasoning to pitch to finance and other business teams like procurement. Show that you have a plan, for this year and for two or three years to come. That can sound risky, but it doesn’t have to be ironclad and exact. Leave some wiggle room and emphasize the flexibility you will need in order to seize emerging opportunities.

Focus, in general, on the opportunity cloud presents for IT and for the company—namely lower costs and greater flexibility. But neither you nor top management is likely to be keen to jump from one log to another in midstream—also known as a big bang approach. So, suggest a target of moving, let’s say, 5% of capex into opex for three years so that you can pilot new ways of doing things without risking the whole operation.

Make a Plan B (and Maybe Even a Plan C) for IT Spending

Everyone in management knows (or can be persuaded) that IT is changing fast and that the implications for every business are a bit different. YOUR role is to take sensible steps forward.

Then, return to the bottom line. Don’t promise to keep cutting, but do suggest that cloud—done right, and applied to high-value areas—can have an immediate impact and can prepare the way for further exploration of the cloud opportunity.

Remind yourself and your business leaders that the end result should be more cost-efficient IT without the need for periodic large capex investments to update tools and systems. It’s a very powerful argument. Start by convincing yourself and the others will follow.