Every business owner or leader looks for opportunities to turn Capital Expenditures into Operational Expenditures. And within the IT world you have more choices than ever when it comes to choosing between Capex vs Opex.
From cloud computing to web-based applications and more, technology solutions, like many other modern business models, are becoming more subscription-based. It may make more sense for your company to explore whether a capital expenditure (a large outlay of money) or an operational one (a smaller, pay-as-you-use type setup) makes sense for your business when it comes to your IT spend.
Pros and Cons of Capex
Capex, for your IT budget, means a large outlay of funds to purchase something outright – for example, purchasing servers. Typically, capital expenditures require a large amount of money upfront to be available to purchase items like software or servers. And with technology constantly changing, items purchased outright can often become outdated after a few months or years, meaning you will need to outlay a large amount of cash again soon to replace outdated, and sometimes disparate, systems.
In addition, making a larger purchase means attempting to predict your organization’s needs for the future, which can be difficult to truly determine. One example of this is storage – if you buy physical servers, you must decide what amount of storage you will need. But your business isn’t static, and your needs may change to require more (which isn’t easily scalable and means you have to outlay even more money), or you might have overestimated and need less (which means you overspent and now have a depreciating server or servers you have no use for).
However, if you would like to fully own the solution you’re purchasing, Capex may make sense. For example, it can be beneficial to own your own servers instead of dealing with license renewals like you would on an Opex basis. Or, if you are confident in your technology needs and know exactly what you need, an outright purchase could also be the right move. Finally, with every business budget being unique, sometimes the way your business spends money may line up better with a Capex expenditure.
Pros and Cons of Opex
Operational expenditures for IT are becoming more of a norm in today’s world. With so much storage migrating to the cloud, the cost model for data storage has shifted. You can now pay for storage on a monthly, as-used basis, instead of trying to predict how much you will need and spending a large amount of your technology budget at once. You can also quickly and easily scale up storage if needed – or scale back.
However, storage isn’t the only thing moving to the cloud or to a subscription-based fee. There are many softwares that are now “SaaS” – software-as-a-service. Microsoft has cloud-based services such as Azure that are also based around pay-as-you-use structures. They also have Microsoft 365 that scales up and down as your employee base changes.
And of course, while not entirely the same, paying for a managed IT services partner is a slightly different cost model than paying for an internal IT department. Operational expenditures mean a smaller expense up front. And it can mean cost savings in the long run, as you are not paying for items you don’t use. It also makes your IT budget more predictable, since you decrease the amount of sudden, large expenses you could incur, and have a predictable recurring cost structure.
While there are many positives to Opex model, it should be noted that it’s not always cheaper. For example, many perceive moving to the cloud as a cost savings. However, in some cases, it can increase costs, but it alters the timeline in which you pay for the solution quite significantly, with smaller expenditures over time. It is a much less permanent solution than Capex as mentioned, which can be a positive or a negative. Some management individuals may see Opex as a negative, as it is more of an expense than an investment. Many times, you do not “own” the mentioned solutions. However, with the everchanging technology landscape, it may still be more advantageous to have flexibility with Opex than investments with Capex.
Compare Capex vs Opex for Your Organization
While there is no right answer for how to structure your IT budget, especially in the small-to-medium sized business space, it is important to be aware of the new developments in the wide variety of technology solutions now available on a more Opex, rather than Capex basis. Discuss with your technology and management teams to compare Capex vs Opex options for your various technology solutions and see what is right for you.
Editor’s Note: This article was originally published in 2021 and has since been updated for relevance and accuracy.