Cloud OPEX vs. CAPEX - Which is the Better Choice?

Among CIOs and CFOs debate swirls regarding how to best budget for and acquire IT resources. The key questions are; should companies own, lease or essentially “rent” IT services via cloud computing? It’s actually a tougher choice than you may think.

An Economist article explains the “Big Data” conundrum facing global enterprises. Data volumes are increasing faster than many companies have the capacity to store much less mine them for insights. In this exploding “data revolution” many companies are also finding their internal processes—much less budgets—for acquiring technology are not keeping up with business user needs.

That’s why cloud computing is so attractive. With the public cloud model, compute, memory and storage can be acquired on a “pay per use” basis. In the public cloud there is typically no hardware/software to buy upfront, thus companies can use operating expense budgets (OPEX) to fund their needs, giving them plenty of budgeting flexibility. The alternative is to purchase needed hardware and software outright—thus capitalizing assets (CAPEX).

On the surface, going the OPEX route seems to be the better choice, but it’s a more complex decision than it seems.

One primary factor in the CAPEX vs. OPEX debate really boils down to how much of each budget a company has (as determined by the CFO). Moreover, plenty of small to medium size businesses are capital constrained. They simply don’t have tons of dollars to invest in assets. For these companies it makes sense to discover options such as leasing or cloud that can convert a given investment into an operating expense that would flow from SG&A on the income statement.

Larger companies usually have more significant capital budgets. That said they still must balance various and competing alternatives, seeking the best return on investment. These companies have capital budgeting processes completed on an annual basis and they’re usually only capital constrained for unexpected mid-year requirements or restricted based on investor and/or industry expectations/guidelines for ratios such as current ratio or Return on Assets (ROA).

Another consideration in deciding CAPEX vs. OPEX for IT acquisitions is resource utilization per Chief Information Officer Bernard Golden. In a CIO Magazine article, Golden provides an example of the decision to buy or rent a car. If you plan on using the car full-time, then purchasing/financing the car likely makes the most sense. However, if you plan on using the automobile only for a week a month, then perhaps renting is the better choice.

In the same way, if you plan on running IT resources at near or full resource utilization for long periods of time then it probably makes best economic sense to purchase assets (if you have the CAPEX to do so). Using IT resources for just a little while, and then shutting them down? This is probably the best use case for cloud computing according to Golden.

There are many facets to the OPEX vs. CAPEX debate in terms of cloud computing, and certainly more than can be discussed in a short article. However more than discussions of which funding model (CAPEX vs. OPEX) for IT is best, a more realistic choice architecture is 1) which budget do you have available (i.e. some companies have little to no capital budgets)? and 2) do you plan to fully utilize the IT asset for long periods of time (i.e. 1-3 years or more) or do you need it on a temporary basis (days, weeks, months)?

Answers to these questions will initially help you determine which (if any) cloud computing options are the best business choice for your company.