There used to only be one way an organisation could pay for its IT infrastructure – as an upfront, capital expense (CapEx).
To support the business, IT managers would have to procure physical servers, racks, network pipes, hardware, and all the things that come along with infrastructure, including storage space and facilities, cooling systems, and the associated software.
Before the systems had even been turned on, the business had incurred thousands upon thousands of dollars of CapEx, only to have to do it all again at the next refresh cycle.
These big infrastructure investments are what earned IT the reputation of being a ‘cost centre’; a necessary but expensive budgetary line item that didn’t add much value to the business. With the added expense of maintenance, most traditional IT departments are typically spending 70-80% of their budgets servicing operations, which inevitably leaves very little room to innovate, compete and grow faster. It’s no wonder IT is viewed as an expensive burden that has to be tightly managed.
Changing the way you pay
However, as technology has developed, so too has the way in which it’s paid for. Cloud computing has shifted IT spending to a pay-as-you-go financing model, similar to utility billing. The delivery of cloud-based technology solutions ‘as a service’ has made it possible to turn IT operations into an operational expense (OpEx), as opposed to capital expense (CapEx), removing the need for any hefty upfront investments and replacing them with predictable monthly fees.
Many IT managers have realised that these smaller ongoing costs versus cyclic infrastructure builds are the key to bringing more value to the business and changing perceptions of IT. By getting costs under control and offloading the infrastructure burden to a third party, the IT department can direct its effort towards exploring new products and technologies, upgrading software, and finding innovative solutions that could save the business money, enable it to overtake competitors, or break into new markets.
But the true business value of the OpEx model is more about agility and utilisation than any other cost consideration. Deploying your own infrastructure, as a CapEx model, means buying for your organisation’s own maximum workload. If that only happens once a year because you’re a retailer with a big Christmas sale or a tax agent doing your clients’ returns in one frenzied period, most of your on-premises equipment will sit idle the rest of the time. And just because those systems aren’t in use doesn’t mean they’re not costing you money – they still need to be maintained, powered and – when the time comes – upgraded.
According to a Cloud Technology Partners article, many companies carry up to 5 times the required hardware, networking, and data centre space during steady state business cycles. Most enterprises have hardware utilisation rates significantly below 20% because of the excess capacity required to handle peak demand, as a result spending much more on compute and storage than is required.
With the cloud-based OpEx model, this doesn’t have to happen. Resources can be provisioned and de-provisioned instantly, as needed, without an exorbitant cost attached, which means IT can scale up and down according to the business’ needs.
As the Cloud Technology Partners article states, “Moving from 20% to near 100% utilisation provides significant cost advantages and even greater value in the ability to quickly solve business problems without waiting for software and hardware procurement and installation.”
CapEx and OpEx might seem like an issue for the accounting department, but the financing model you choose will determine just how strong, competitively differentiated, and secure your organisation becomes over the long haul. CIOs and IT managers need to understand the benefits of accounting for technology investments as an operational expense versus a capital expense, and be able to articulate the potential financial implications to the CFO when he or she asks.
The cloud-based OpEx model can provide significant savings and nearly infinite agility, so it doesn’t make much sense to spend massive amounts of capital on building, maintaining, and operating data centres. This is best left to a managed service provider who does this exclusively.
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