Welcome!

Microsoft Cloud Authors: Elizabeth White, Mihai Corbuleac, Pat Romanski, David Bermingham, Steven Mandel

Related Topics: @CloudExpo, Microservices Expo, Microsoft Cloud, Containers Expo Blog, Apache, Cloud Security

@CloudExpo: Article

Cloud Benefits: The Opex / Capex Benefit Debate

The bottom line is that CAPEX to OPEX shift should rarely be the deciding factor in a systems selection.

With the cloud space getting crowded each day, cloud service providers list a host of benefits by moving to the ‘Pay as you Go' model.... Among other benefits, reduced capital expenses (fixed Capex costs), and increased operating expenses (variable Opex costs) is listed as a key benefit.

The article attempts to analyze this.

In general, from an accounting perspective, by shifting from a capex to opex based model, the benefits can be many. Some of these could be:

  • Use of Opex allows deducting expense in the current year and reduces tax liability applied on net income.
  • Opex benefits due to time value of money (100 $$ saved today is better than 100 $$ saved next year)
  • No upfront capex expenditure if cost of capital is high and /or capital is not available
  • By civerting  capex to opex, the capital saved can be used elsewhere giving a better yield.

All points taken, if you ask a accountant, he would say that it's just accounting mechanics... He will also list down couple of points that go against this and as one can notice most of the cloud vendors do not mention this.

  • Opex decreases the company's book value as the expense moves to profit & loss statement hitting the bottom line.
  • Opex decreases the company's EBITDA.
  • Cost of On-demand services is always high as they carry a  utility premium. Think of renting a car vs. a buying a car. By renting a service, you are in a way borrowing money from the service provider, and paying the loan back to them in monthly payments.
  • P&L, Balancesheet and cash flow statement looks less attractive. More often than not, the real tangible benefits of moving from capex to opex are governed by other technical / business factors .

Capex to opex movement is just an accounting measure and often tactical. It may well serve some short term financial objectives that the company needs but it is hard to prove that this is indeed true in the long run.

What Is Better: Capex or Opex
Should one really care about the opex and capex debate and what should be the choice? Or this is contextual. Often, the reasons of moving from Capex to Opex could be very different and purely financial. For e.g:

  1. Shortage / Availability of capital
  2. High cost of capital
  3. Overall economic environment which impact investment decisions.
  4. Better use of available capital
  5. Benefits from alternate capex investment outweighs the higher cost of ‘pay as you go service' in the long run.

The objectives could be the other way around also (Reduce Opex and increase Capex), for e.g,:

  • To boost profits (artificially, some may say) to report to investors and increase shareholder value
  • A higher value of assets on its balance sheet
  • Cost of capital is cheap and readily available.
  • No better use of capital What this means is that the movement of capex to opex or vise versa is highly contextual.

It may all sound good due to current economic environment and capital constraints but may  not hold good in all cases and in the long run

The Real Benefits
The real benefit must be seen from both Financial as well as business / technical objectives. Once the business / technical objectives are ascertained, the appropriate financial treatment (capex / opex) need to be done based on the objectives / constraints. For example, the financial needs of a company could be:

  1. Optimizing capital investment due to shortage / Availability of capital
  2. Optimize overall Cost of Capital
  3. Workaround the difficult economic environment which impact investment decisions.
  4. Investment Options at hand
  5. ROI
  6. Better profit reporting to investors and increase shareholder value
  7. Higher value of assets on balance sheet
  8. Better Cash flow management The financial objective may be tactical in many cases and may change over a course of time.

That said, the real reasons behind a ‘pay as you go' model or so called ‘opex' model, may be unrelated to the financial context with very different objectives (Often business driven). These could be:

Better Utilization Rates
Here is where the real benefits of shared services come into play.  If a company is using less than 30% of installed capacity, ‘pay as you go' model can give significant cost benefits. If it is already using more than 70 %, the benefits may not be that high as utility services come at a premium as compared to owned service for obvious reasons..

  • Operational advantages
  • Service level improvements
  • User satisfaction considerations
  • Keeping pace with the technology upgrades

Due to the rapid changes in technology,  it doesn't make sense to sink or locking money into equipment that's surpassed by the very next model. Opex in the form of pay as you go models help in this regard. Costs are reduced and shifted from capital expenses to operating expenses, which save money. The capital saved can be used elsewhere in more productive investments or reduce the cost of capital.

  • Better scalability, metering, automation and virtualization - all for less money than a traditional data center.

Bottom line is that CAPEX to OPEX shift should rarely be the deciding factor in a systems selection.

The choice architecture should be based upon meeting the business and technical requirements.

A company can choose to use a public shared cloud - on rent and hence opex based model OR go for a private cloud  - owned and capex OR an internal cloud (virtualized) that can satisfy all the business / technical requirements for the CIO while also meeting the financial objectives for the CFO.

It all depends on the context. A WIN-WIN situation for all is one that should be looked at.

Brief on Opex and Capex

Capex
Capital expenditures are expenses to create assets (or add value to an existing asset) for future benefts with a life that extends beyond the tax year.

  • Cannot be fully deducted in the period when they were incurred. Tangible assets (building) intangible assets ( h Money spent on inventory falls under capex ardware etc) are depreciated and intangible assets (patent etc) are amortized over time.
  • Money spent on inventory falls under capex
  • Show up in Balance Sheet and Cash Flow from Investing head in the Cash flow statement


Opex
Refers refers to expenses incurred in the course of ordinary business, such as sales, general and administrative expenses (and excluding COGS, taxes, depreciation and interest

  • Operating expenses are fully deducted in the accounting period during which they were incurred.
  • Show up in Profit and loss statement.
  • End up in Cash Flow from operating activities head in the Cash flow statement

More Stories By Sunil Pathak

Sunil has close to 16 years experience in Information Technology providing leadership, management, planning, system development and engineering, training, people development, methodologies, and process support. He has worked in the area of internet based technology solutions, ecommerce applications, product development, product maintenance, e-business platforms, portals, collaboration, content management, and business intelligence.

He currently works for Colt Technologies Services, Bangalore, India as Head of Systems Development and Support. Sunil holds an Executive MBA (IIM Calcutta), Masters in Technology (IIT Kanpur) and a Bachelor of Engineering in Electrical Engineering. He also holds diploma in entrepreneurship from EDI Ahmedabad. He can be reached at :
Linkedin - http://in.linkedin.com/pub/sunil-pathak/4/501/a9b
Twitter - @sunil__pathak


Disclaimer:The opinion expressed here are my own and not necessarily those of my employer.

@ThingsExpo Stories
Digital payments using wearable devices such as smart watches, fitness trackers, and payment wristbands are an increasing area of focus for industry participants, and consumer acceptance from early trials and deployments has encouraged some of the biggest names in technology and banking to continue their push to drive growth in this nascent market. Wearable payment systems may utilize near field communication (NFC), radio frequency identification (RFID), or quick response (QR) codes and barcodes...
Artificial Intelligence has the potential to massively disrupt IoT. In his session at 18th Cloud Expo, AJ Abdallat, CEO of Beyond AI, will discuss what the five main drivers are in Artificial Intelligence that could shape the future of the Internet of Things. AJ Abdallat is CEO of Beyond AI. He has over 20 years of management experience in the fields of artificial intelligence, sensors, instruments, devices and software for telecommunications, life sciences, environmental monitoring, process...
You think you know what’s in your data. But do you? Most organizations are now aware of the business intelligence represented by their data. Data science stands to take this to a level you never thought of – literally. The techniques of data science, when used with the capabilities of Big Data technologies, can make connections you had not yet imagined, helping you discover new insights and ask new questions of your data. In his session at @ThingsExpo, Sarbjit Sarkaria, data science team lead ...
The IETF draft standard for M2M certificates is a security solution specifically designed for the demanding needs of IoT/M2M applications. In his session at @ThingsExpo, Brian Romansky, VP of Strategic Technology at TrustPoint Innovation, will explain how M2M certificates can efficiently enable confidentiality, integrity, and authenticity on highly constrained devices.
There is an ever-growing explosion of new devices that are connected to the Internet using “cloud” solutions. This rapid growth is creating a massive new demand for efficient access to data. And it’s not just about connecting to that data anymore. This new demand is bringing new issues and challenges and it is important for companies to scale for the coming growth. And with that scaling comes the need for greater security, gathering and data analysis, storage, connectivity and, of course, the...
A critical component of any IoT project is the back-end systems that capture data from remote IoT devices and structure it in a way to answer useful questions. Traditional data warehouse and analytical systems are mature technologies that can be used to handle large data sets, but they are not well suited to many IoT-scale products and the need for real-time insights. At Fuze, we have developed a backend platform as part of our mobility-oriented cloud service that uses Big Data-based approache...
The IoTs will challenge the status quo of how IT and development organizations operate. Or will it? Certainly the fog layer of IoT requires special insights about data ontology, security and transactional integrity. But the developmental challenges are the same: People, Process and Platform. In his session at @ThingsExpo, Craig Sproule, CEO of Metavine, will demonstrate how to move beyond today's coding paradigm and share the must-have mindsets for removing complexity from the development proc...
trust and privacy in their ecosystem. Assurance and protection of device identity, secure data encryption and authentication are the key security challenges organizations are trying to address when integrating IoT devices. This holds true for IoT applications in a wide range of industries, for example, healthcare, consumer devices, and manufacturing. In his session at @ThingsExpo, Lancen LaChance, vice president of product management, IoT solutions at GlobalSign, will teach IoT developers how t...
Manufacturers are embracing the Industrial Internet the same way consumers are leveraging Fitbits – to improve overall health and wellness. Both can provide consistent measurement, visibility, and suggest performance improvements customized to help reach goals. Fitbit users can view real-time data and make adjustments to increase their activity. In his session at @ThingsExpo, Mark Bernardo Professional Services Leader, Americas, at GE Digital, will discuss how leveraging the Industrial Interne...
Increasing IoT connectivity is forcing enterprises to find elegant solutions to organize and visualize all incoming data from these connected devices with re-configurable dashboard widgets to effectively allow rapid decision-making for everything from immediate actions in tactical situations to strategic analysis and reporting. In his session at 18th Cloud Expo, Shikhir Singh, Senior Developer Relations Manager at Sencha, will discuss how to create HTML5 dashboards that interact with IoT devic...
SYS-CON Events announced today that Ericsson has been named “Gold Sponsor” of SYS-CON's @ThingsExpo, which will take place on June 7-9, 2016, at the Javits Center in New York, New York. Ericsson is a world leader in the rapidly changing environment of communications technology – providing equipment, software and services to enable transformation through mobility. Some 40 percent of global mobile traffic runs through networks we have supplied. More than 1 billion subscribers around the world re...
We’ve worked with dozens of early adopters across numerous industries and will debunk common misperceptions, which starts with understanding that many of the connected products we’ll use over the next 5 years are already products, they’re just not yet connected. With an IoT product, time-in-market provides much more essential feedback than ever before. Innovation comes from what you do with the data that the connected product provides in order to enhance the customer experience and optimize busi...
The increasing popularity of the Internet of Things necessitates that our physical and cognitive relationship with wearable technology will change rapidly in the near future. This advent means logging has become a thing of the past. Before, it was on us to track our own data, but now that data is automatically available. What does this mean for mHealth and the "connected" body? In her session at @ThingsExpo, Lisa Calkins, CEO and co-founder of Amadeus Consulting, will discuss the impact of wea...
In his session at @ThingsExpo, Chris Klein, CEO and Co-founder of Rachio, will discuss next generation communities that are using IoT to create more sustainable, intelligent communities. One example is Sterling Ranch, a 10,000 home development that – with the help of Siemens – will integrate IoT technology into the community to provide residents with energy and water savings as well as intelligent security. Everything from stop lights to sprinkler systems to building infrastructures will run ef...
Whether your IoT service is connecting cars, homes, appliances, wearable, cameras or other devices, one question hangs in the balance – how do you actually make money from this service? The ability to turn your IoT service into profit requires the ability to create a monetization strategy that is flexible, scalable and working for you in real-time. It must be a transparent, smoothly implemented strategy that all stakeholders – from customers to the board – will be able to understand and comprehe...
You deployed your app with the Bluemix PaaS and it's gaining some serious traction, so it's time to make some tweaks. Did you design your application in a way that it can scale in the cloud? Were you even thinking about the cloud when you built the app? If not, chances are your app is going to break. Check out this webcast to learn various techniques for designing applications that will scale successfully in Bluemix, for the confidence you need to take your apps to the next level and beyond.
SYS-CON Events announced today that Peak 10, Inc., a national IT infrastructure and cloud services provider, will exhibit at SYS-CON's 18th International Cloud Expo®, which will take place on June 7-9, 2016, at the Javits Center in New York City, NY. Peak 10 provides reliable, tailored data center and network services, cloud and managed services. Its solutions are designed to scale and adapt to customers’ changing business needs, enabling them to lower costs, improve performance and focus inter...
So, you bought into the current machine learning craze and went on to collect millions/billions of records from this promising new data source. Now, what do you do with them? Too often, the abundance of data quickly turns into an abundance of problems. How do you extract that "magic essence" from your data without falling into the common pitfalls? In her session at @ThingsExpo, Natalia Ponomareva, Software Engineer at Google, will provide tips on how to be successful in large scale machine lear...
SYS-CON Events announced today that Fusion, a leading provider of cloud services, will exhibit at SYS-CON's 18th International Cloud Expo®, which will take place on June 7-9, 2016, at the Javits Center in New York City, NY. Fusion, a leading provider of integrated cloud solutions to small, medium and large businesses, is the industry's single source for the cloud. Fusion's advanced, proprietary cloud service platform enables the integration of leading edge solutions in the cloud, including cloud...
SYS-CON Events announced today that DatacenterDynamics has been named “Media Sponsor” of SYS-CON's 18th International Cloud Expo, which will take place on June 7–9, 2016, at the Javits Center in New York City, NY. DatacenterDynamics is a brand of DCD Group, a global B2B media and publishing company that develops products to help senior professionals in the world's most ICT dependent organizations make risk-based infrastructure and capacity decisions.