Expert Tips: CapEx and OpEx Expenses in the Cloud
Owning and operating a data center is no longer considered a sign of corporate wisdom. Private cloud computing concepts and utility services in the cloud are redirecting established understandings of data privacy and stimulating new modes of thinking. The recent recession (that resulted in budget cuts and rethinks on capital investments), made a business case for the cloud. This in turn promoted a debate around CapEx and OpEx. [Accounting experts call capital intensive expenditure CapEx (Capital Expenses) and revenue intensive expenses OpEx (Operating Expenses)].
A quick look at the history of technology, in context, is revealing. The CapEx vs OpEx debate is not new. The outcome is predetermined. Companies that considered it important to generate their own power during the industrial revolution initially set up their own power plants. However, they quickly gave up the idea of investing in power generating equipment and even let their investments rust, when power was provided as a utility by enterprises that made power their business. They found that it was cheaper to buy power that generate it themselves. It is, therefore, axiomatic that capital intensive data centers will be given up in favor of utility based services in the cloud.
It is therefore, not surprising that much of the discussion around CapEx and OpEx in the cloud is centered on costs. Of course, the bottom line for the business is profit. But, a simplified calculation of CapEx or OpEx costs is not possible.
The mathematics of CapEx is not as basic as taking the average selling price of an IU server and dividing it by 36 months (which is the average expecte life of equipment)! There are associated costs, which cannot be ignored such as power, floor space, storage, IT operations or overhead costs of various kinds that exercise the attention of Accountants. Every cost adds to the overall cost and significantly contributes to the monthly expenses. Futhermore, cost comparisons–that do not engage the attention of accountants–ignore the utilzation ratios of the internal server and the opportunity costs that are lost at different levels of utilization.
Those who pontificate on the OpEx advantages of the cloud and hold forth on the pay as you go options, fail to appreciate it completely. The significance does not lie in merely costs. If OpEx is projected over a long time line, it could prove to be more expensive than CapEx options!
However, there are no long term commitments associated with cloud storage accounts. OpEx is not limted by public markets as it does not tie up capital and is extremely attractive to businesses that have their eye fixed on the profit margins. The potential scalability option itself carries value and enterprises in the cloud may even be willing to pay a premium for that flexibility! End users migrating to the cloud will find they can maintain one or more web applications at a fraction of the normal cost. The hardware utilization ration jumps up to 80%.
Server technology refreshes are a thing of the past. There is a significant dip in the cost of designing or deploying new applications. Operational efficency can be achieved through a single infrastructure practice and overheads can be reduced through effective self service.
The reality is that Cloud technology is distruptive and debates around disruptive concepts are unavoidable.
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