Cloud Service Management Capex vs Opex Shift

1. Capex vs Opex

3. CapEx
• Capital Expenditure
• Money a company spends towards fixed
assets, such as the purchase, maintenance, and
improvement of buildings, vehicles,
equipment, or land
• Also referred to as PP&E (Property, Plant, and
Equipment)
• Capital expenditures are usually long-term
investments in the business

4. CapEx - Examples
• IT infrastructure (servers, routers, switches,
software, network cabling, etc.)
• IT equipment for employees
• Data center real estate purchase
• Real estate renovations
• Asset upgrades
• Infrastructure repairs

5. CapEx - Benefits
• Expected costs
– allows organizations to budget accordingly
• Asset ownership
– buying the asset is the sole owner
• Expenditure stability
– businesses know their associated costs, and can
create models that forecast costs as needed
• Full control
– complete control over access, security, and updates

6. CapEx - Challenges
• Large upfront costs
– challenging to allocate funds toward other much-
needed business expenses or revenue-generating
initiatives
• Big commitment
– make things more difficult if a future business decision
causes a change in direction
• Extended approval processing time
– fund release processes can take a significant amount of
time
• Full responsibility

7. OpEx
• Operating expenses
• Money a company spends to run day-to-day
operations.
• Generally used up within the year they are
purchased

8. OpEx - Examples
• Business-related operating costs (rent, utilities,
salaries, legal fees, marketing, etc.)
• Data center or off-premises cloud costs
• Cloud-based software, application, or service
subscription fees (SaaS, DaaS, IaaS, etc.)
• Webhosting and domain licenses
• Software and service support
• IT infrastructure maintenance and repair fees

9. OpEx - Benefits
• Smaller investment and approval time
– subscription basis and doesn’t involve a hefty cash
commitment
• Less responsibility
– the business is not in charge of upgrades or day-to-day
maintenance
• More flexibility
– it’s easier to switch providers, scale back services, or
incorporate additional compatible solutions as needed
• No overprovisioning
– autoscale up and down as needed

10. OpEx - Challenges
• Ongoing and varying costs
– vary significantly depending on multiple factors,
including service-level upgrades or resource
consumption
• Less ownership and control
– the organization contracting the resources does not
own the asset itself and has less control over its
capabilities
• Unclear expenses
– difficult to see exactly why costs are changing or who
is driving the fluctuation

11. CapEx vs OpEx
CAPEX OPEX
Stands for Capital expenditure Operating expenses
Meaning
Costs of long-term
investments — benefits
expected to last longer than
one year.
Costs of day-to-day operations
— benefits used up within the
same year they are
purchased/incurred.
Paid for
Upfront, whether through cash
from savings or retained
profits or taking on debt.
Pay-as-you-go pricing,
ongoing costs that are covered
by income as they occur.
Amount paid
Huge investments that often
tie up cash in long-term
investments.
Relatively small, ongoing
payments (monthly, quarterly,
annually)
Opportunity cost
Often involves overbuying
now to meet future capacity
requirements then.
Frees up cash flow to invest in
other areas because there is no
large, upfront payment.

12. CapEx vs OpEx
CAPEX OPEX
Ownership and
responsibility
Buying transfers ownership to
the buyer, including full
responsibility and control,
including access and building
updates for both owned
hardware and software.
A vendor, such as a cloud
provider, is responsible for
system updates, upgrades, and
replacements for hardware and
software.
Accounting treatment
Recorded in the balance sheet
as assets, only appearing in
income statements as
deductions.
Recorded in profit and loss
statements as expenses.
Taxation treatment
Deductible over the lifetime of
a tangible asset. Amortized
over the life of an intangible
asset.
Deducted in full within the
same year they are incurred.
Returns on Investment
Gradual over the life cycle of
the asset.
Earned in shorter billing
cycles.
Financing
Capital or borrowed cash from
financial institutions.
Retained profits, savings, soft
loans, bank overdraft.
Examples
Land, building, IT equipment,
patents, etc.
Subscriptions, wages/salaries,
marketing, etc.