CapEx to OpEx - The Huge Shift Taking Place in Information Technology
Written by Philip Magson, 22 October 2014
Oil baron Paul Getty famously said "if it appreciates, buy it, if it depreciates, lease it", a maxim that has been followed for information technology hardware for many many years, but which is only recently extending to software, business continuity, disaster recovery, firewalls and security. Why? And when it makes so much sense, why has it taken so long?
From a business finance standpoint, leasing equipment works - heavy upfront capital expenditure (CapEx) is eliminated in favour of smaller ongoing expenditure (OpEx). Depreciation is no longer a consideration, and frequently lease payments are fully tax deductible. Hardware can be refreshed every few years, meaning an end to outdated technology. Lastly - and perhaps most significantly - the cash-flow benefits are enormous, with small regular payments replacing substantial upfront payments that can place considerable strain on finances. Altogether, to many people, leasing gives a ‘win win’ scenario from an business owner’s perspective.
The CapEx to OpEx shift is also happening in software, business continuity, disaster recovery and firewalls, and whilst the model is not quite the same as leasing, in that software tends to be bought on a subscription basis and there are no outright ownership options at the end of the lease term, the principles of removing upfront expenditure and depreciation in favour of fully tax-deductible expenditure is identical, and similarly advantageous. Added to this mix is hybrid solutions that blend hardware with subscription services - an interesting new development that I’ll discuss below.
In my conversations with clients, partners and would-be clients about this I’m getting a tremendous response. On the one hand it's an easy message to put across - after all, who doesn’t want to save money on their IT expenditure?! On the other hand, it requires a transformation in thinking, away from heavy capital expenditure and outright ownership towards much lighter operating expenditure but effectively renting software and services. That too brings advantages. I'm keen to explore the idea here, share with you some of our experiences and highlight what you can expect to see coming through from vendors in the not-too-distant future.
What Options are Driving CapEx to OpEx?
As I’ve noted, hardware leasing is very commonly accepted and has been very popular for many years. Some organisations such as startups do still prefer to own equipment outright, or don’t have access to leasing, but for those that do, it’s tremendously advantageous to move from hardware purchases made as CapEx to leasing payments as OpEx.
Infrastructure as a Service - IaaS
Infrastructure as a Service allows organisations to put core business infrastructure in the cloud, and purchase that infrastructure as a service rather than a product. Providers such as Outsourcery, Rackspace and Amazon EC2 have come to the market and have been extremely successful in attracting customers around the world. The key transformation is in the removal of on-premise servers in favour of the cloud, which brings advantages in terms of scalability, maintenance cost, portability and flexibility, with claims of development time reducing by around 50% being commonplace.
With this model CapEx spending on server and storage hardware is shifted to OpEx via the move to the cloud - organisations simply never actually own the equipment, rather a subscription is paid.
Platform as a Service - PaaS
Platform as a Service takes things up a level, providing both the flexible and scalable cloud infrastructure and stack upon which applications (such as a web application) can be built, which is ideal for organisations looking to develop their own systems to suit their own needs, whilst having the core infrastructure taken care of via the cloud. A good example of PaaS is Salesforce, which from beginnings as a cloud-based CRM application has evolved to become hugely significant platform upon which many thousands of organisations have built business-critical applications.
In line with IaaS, Paas sees CapEx on hardware shift to OpEx, with the accompanying benefits that brings.
Software as a Service - SaaS
Software as a Service is perhaps what most people to consider the cloud and includes applications such as Microsoft Hosted Exchange, Google Apps, Apple iCloud, Online Accounting Packages and a whole host of other tools like mind mapping applications and diagramming applications…the list is growing longer by the day.
Most of these applications are charged on a small, monthly per-user basis, eliminating large up-front licence costs charged to CapEx, shifting expenditure to OpEx. As I’ve noted this isn’t the only advantage
Business Continuity as a Service
We talked recently about fantastic products from datto, which a number of our customers are using and benefitting from already. With many of these products, the usual substantial up-front investment is reduced in favour of affordable monthly subscriptions, which buy cloud integration with backups and disaster recovery, aiding flexibility.
Datto's products are hybrid, meaning that the solution relies on both an on-premise server and cloud storage. Whilst it may seem counterintuitive to rely on a piece of kit on the ground when we are talking about the cloud, it makes a great deal of sense when you consider that the arrangement brings a 'best of both worlds' benefit: local data immediately protects data prior to its being uploaded to the cloud, and cloud data ensures integrity should a substantial site-wide disaster damage the local equipment. Factor in broadband bandwidth, reliability limitations and time-to-full-recovery in the event of a disaster, and hybrid is a smart choice.
Coming back to cost, datto products come with a monthly subscription, which covers the storage of your data in the cloud, neatly spreading the cost, and of course shifting from large CapEx on hardware to a blended CapEx/OpEx model.
Firewall as a service FWaaS
New products are coming on to the market which offer firewall as a service, again dispensing with the bulk of the upfront investment in favour of much smaller, ongoing payments.
As with many of these offerings these services are support by strict SLAs, and support is available throughout the period of the contract. A good example of this is Exertis Manage, which offers a hybrid FWaaS solution comprising a hardware firewall appliance located on-premise, 24x7 support via a Network Operation Centre and a Global Management System that makes management, updates and configuration of the device smooth and straightforward.
Network as a Service
In addition to on-premise firewall systems, providers such as OpenDNS take the virtual security fence outside your premises and into the cloud, with the aim of preventing malicious traffic, attacks and content from getting anywhere near your systems. Additionally, OpenDNS provides network filtering technologies to ensure your staff don't view anything they shouldn't - alongside this the high performance DNS network the company has developed ensures staff get the content they should be viewing very quickly indeed, even if there are outages in global DNS infrastructure.
The service is bought on a monthly subscription basis and is available in a range of Business and Personal packages, some of which are even completely free of charge, which is even better for your wallet!
As you can probably gather, we're big fans of the shift from CapEx to OpEx for a whole host of reasons, but above all, it's simply better for our clients. It's more flexible, it's often much more tax-effective, it means access to the most up to date technology and it's more effective - in short, what's not to like?
If you're as taken with the proposition as we are, let us know and we'd be delighted to explain how we can introduce a better way of buying IT equipment and services to your business - contact us on 01382 250 900 or firstname.lastname@example.org
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