There has been a longstanding tradition in IT departments to own their own technology. Self-hosting gives companies complete control in data center operations, which can be appealing to some. However, the economy and technology are changing, making many companies rethink their capital and operational expenses. Technology is evolving so rapidly that capital projects are often in danger of being outdated before they are even implemented, which is why CFOs are eager to shift more of their IT costs from a capex budget to an opex budget.
Operating expenses are usually paid monthly and can be adjusted more easily, where capital expenses are budgeted once per year, locking you into any investment. By lowering an organization's capital expenditures, more funding can be made available to spend on activities that may directly increase revenue.
There are a few approaches to transitioning expenses to opex. Not all methods work for every company, but these are a few areas to consider first.
Cloud Computing
Cloud computing is a method of acquiring and utilizing IT services that is growing in popularity. In traditional IT model, an organization would maintain its own data center. It housed its own servers, storage systems and business applications, which results in added power and physical space requirements. Companies would hire and retain their own personnel, and deal with the day-to-day hassles of connectivity issues, server downtime, etc. In the cloud model, the service provider runs the data center on behalf of the organization, and provides the same services without the same capital requirements.
Instead of paying a lot of cash upfront for systems, software, and networking gear, companies specify their exact needs to their cloud service providers who can work with the company on a contracted pay-per-use plan, without any capital expenditure. Cloud computing shifts the responsibility of maintaining data centers and equipment from the company to the service provider, while at the same time shifting data center expenses from capex to opex.
This also means that companies will be able to scale their operations as needed. Whether they are growing or shrinking, their usage can be increased or decreased to match their requirements. In the traditional IT model, the capital expenses would have continued to rise as the company needed more hardware and personnel. By shifting those responsibilities to the cloud, the operational elements of the company will have more freedom do evolve.
Software-as-a-service (SaaS)
Purchasing and installing software on personal computers might have been an efficient option at one point, but to continue that model can waste a good chunk of the capital expense budget. Software-as-a-service is another way to transition to a predominantly operational expense-based budget. SaaS hosts commercially available software by a service provider and makes them available over the Web. Besides decreasing capital expenses, SaaS has many other benefits. It gives the IT team more options for administration, automatic updates, global accessibility, and ensures all users will have the same version of the software.
SaaS has its advantages, but may not be right for every company. A few things to consider before jumping on the software-as-a-service bandwagon are:
Which applications make sense to replace with SaaS and which ones are best suited to be managed internally.
- The extent to which it needs to be integrated with other systems (both internal and external).
- Whether or not the providers adhere to industry standards to ensure the highest levels of security when accessing SaaS apps.
- The extent to which you need to customize the SaaS solution.
- The provider's Service Level Agreement and historical performance and whether they have a record of lengthy outages.
Outsourcing
Outsourcing can be an effective cost-saving strategy when used properly. Companies sometimes find it more affordable to purchase a product from a manufacturer than to produce it internally. Many CFOs today are turning to outsourcing as a way to mitigate capital expenses. It shifts the responsibility of equipment costs, labor, financing and business risk to the provider or manufacturer, and consolidates the company's expenses into one monthly bill. If you are considering a shift towards a predominantly opex based budget, outsourcing is a good place to start.
Leasing
As new opportunities arise, companies require new equipment to grow. However, purchasing that equipment is not always a smart financial move. Higher start-up costs can make purchasing new equipment not a feasible option for many companies. If you are able to purchase new equipment, changing technology can quickly make it obsolete, leaving your company stuck with old equipment. Leasing equipment allows for smaller monthly payments and a more predictable cash flow. Rather than typing up capital, it can free up more funds for different operations.
These are just a few different methods to transition from a capex to an opex budget. There is no one-size-fits-all plan, and each company must look closely at their own budgets and needs to decide what is best for them.
What are your tips for making the transition? Share them below.
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Matt Smith works for Dell and has a passion for learning and writing about technology. Outside of work he enjoys entrepreneurship, being with his family, and the outdoors.
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