CAPEX for IT: Why So Painful?

June 10, 2013
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CAPEX dollars reserved for investments in plant, property or equipment (including IT) are notoriously hard to secure. In fact, IT leaders often express dismay at the process involved in not only forecasting for CAPEX needs, but then stepping through arduous internal CAPEX budget approvals. What’s all the fuss with CAPEX, and why is it so difficult to obtain?

CAPEX dollars reserved for investments in plant, property or equipment (including IT) are notoriously hard to secure. In fact, IT leaders often express dismay at the process involved in not only forecasting for CAPEX needs, but then stepping through arduous internal CAPEX budget approvals. What’s all the fuss with CAPEX, and why is it so difficult to obtain?

An investment analyst says that 2013 should be a banner year for capital investments. And another analyst, Mark Zandi of Moody’s said in late 2012; “Businesses are flush and highly competitive and this will shine through in a revival of investment spending by this time next year…”

So where’s the CAPEX? Apparently in short supply. A New York Times article says that companies are stock piling cash, and taking on debt, but investing very little in themselves. For now, if there are significant IT investments, it appears OPEX is the preferred route.

CAPEX vs. OPEXFirst, let’s be clear, the CAPEX vs. OPEX debate really is around a shift in cash flows and outlays, there are little to no other financial advantages.  In choosing one vs. the other, it’s a  matter of company policy, as in one instance (CAPEX) assets are categorized on a balance sheet and depreciated, and in the other (OPEX) purchases are expensed through daily operations.

Certainly, there are capital intensive businesses such as telecom, manufacturers and utilities that must continually invest in infrastructure. These types of companies will always spend significantly on CAPEX. On the other hand, there are companies that are CAPEX restricted such as start-ups, companies under the watchful eye of private equity firms, and medium sized businesses that don’t have much CAPEX as a matter of course. 

Obtaining CAPEX can also be painful for IT leaders. At the TDWI Cloud Summit in December 2012, one stage presenter in charge of IT mentioned that getting an idea from the “back of a napkin to (capitalization budget) approval” could take 18 months.

This is why cloud computing options are attractive. With cloud, companies that either have capital to spend (but don’t want to), or those that are CAPEX constrained can take advantage of existing compute infrastructures on a subscription basis. With cloud, investments in IT capabilities are easier to digest via OPEX rather than front-loading a significant chunk of change in a business asset.  And of course, there are also other reasons to choose cloud computing (such as elastic provisioning and full resource utilization) as listed here.

Regardless, it appears that for the present day, CAPEX dollars (especially for IT) will be in short supply. Perhaps this is just one of the many reasons why there’s a flurry of M&A activity in the cloud computing space?

Questions:

  • Why is CAPEX so hard to come by for information technology?
  • Do you have any horror stories (post anonymously if you’d like) about trying to get CAPEX for IT? Was cloud computing an easier discussion with your CFO?
  • When will larger companies relax their CAPEX spending, or is OPEX for IT a long term trend?

(Cash flows and outlays / shutterstock)