Cloud Spend: CAPEX vs OPEX
The flexibility and scalability inherent in cloud computing has fuelled a dramatic increase in the adoption of cloud services and technologies. Organisations have been moving from on-premise servers to virtual servers, hosted private clouds, public clouds such as those offered by Amazon Web Services (AWS), and hybrid clouds that unite the best of both types of infrastructure. In many cases, they are also moving away from buying expensive physical equipment and instead opting for the ‘pay-as-you-go’ or less fixed costs in shared environments.
It is crucial for your company to determine what its financial goals are in relation to cloud computing expenditure and how it plans to meet them. The question becomes, how does your company decide the best way to go about this? What then is the difference between CAPEX and OPEX when it comes to your organisation’s IT infrastructure? The traditional approach prioritises capital expenditure (CAPEX), whereas cloud economics favours operating expenses (OPEX).
In this post, we’ll delve deeper into what these two mean in the context of an organisation's IT resources, and then give a little more focus on the OPEX model, and how to take advantage of the ‘spirit of the cloud’ and the cloud computing OPEX model.
Shared Responsibility Model in our everyday life…
Cloud security, like every other security mechanism or system in life, operates on a shared responsibility model. Your building security operates on a shared responsibility model — your building management provides the building with secure locks either at the entrance to the building doors or gates, while you must secure your personal belongings within your apartment or office. Your national or state security forces provide you with safe streets while you must still remain vigilant on a personal level within your immediate environments. I’m sure you’re already getting the hang of what we mean by having your cloud security and compliance on a shared responsibility model.
What is CAPEX?
Let’s get a good understanding of what CAPEX means, in general business terms, before we delve into CAPEX in IT infrastructure.
Capital expenditure, or CAPEX, is the traditional way of financing business operations. Organisations front the cost of all necessary equipment and infrastructure upfront and then pay for it over time through depreciation and amortisation. CAPEX is the money a company spends to buy, upgrade, or otherwise improve its fixed assets.
CAPEX in IT infrastructure refers to the initial capital expenditure associated with setting up and maintaining IT services. This includes costs associated with the procurement and maintenance of both hardware and software. From procuring data centres, servers, building to house these infrastructure, OS to run on these hardware, patches, other software and applications needed for business process, to maintaining and updating both hardware and software, organisations calculate these costs and define them as their IT capital expenditure —seeing that the costs associated can be defined upfront, even up to a 3 - 5 year period. Organisations that favour the CAPEX model for IT infrastructure argue a certain and defined infrastructure cost being defined upfront is more preferable for planning and budgeting cases.
Cloud services are typically delivered on a pay-as-you-go model, which means that there is little to no upfront investment required (i.e., no CAPEX), and organisations have found it difficult to transition to such a business model, especially for their IT infrastructure and resources.
What is OPEX?
OPEX, or operational expenses, are the costs associated with running a business on a day-to-day basis. This includes labour costs, office space rental, inventory, marketing, and other general and administrative expenses.It basically represents expenses associated with, and dependent on the business operations
Traditionally, in IT, OPEX would refer to IT services purchased through subscription models, such as the sales teams CRM that could be dependent on the team size, or subscribing for Microsoft Office for the organisation, and other SaaS tools needed for and dependent on the business operations.
Cloud Computing - CAPEX / OPEX Tussle
Now, what cloud computing has come to offer goes beyond organisations purchasing SaaS tools based on their operations to be considered as OPEX, but organisations purchasing their entire IT infrastructure and workload based on their operations. This means, taking out the procurement of data centres, servers, desktops and computers for staff, and other major hardware, and to some extent, operating systems; assets that organisations have considered CAPEX for many years, and putting them into the OPEX side of their books.
What this also means is that, as an organisation, you can start calculating your IT infrastructure costs (which could include procurement, setting up, and maintenance) by the end of the month, together with your internet, electricity and water bills—makes you cringe a little, or maybe not.
How Can My Organisation Benefit From An IT Infrastructure OPEX Model?
Organisations, truly can benefit from the cloud computing model, and this comes at a price:
- Organisational Culture change towards IT costs and spending, and
- IT team expertise and resource upskilling
Organisational Culture Change Towards IT Costs and Spending
I’ve been reading a lot of articles talking about what we’ve termed, “reverse migration”. Which simply means that organisations are moving their IT workloads and resources from the public cloud back into their on-prem infrastructure, and at the heart of it all, they cite a lack of control and visibility of their costs, and security of their resources; also citing the high cost of assessing the necessary cloud experts / resources to gain the visibility and control they’ve gotten so used to with the CAPEX IT model.
How I see it, this goes beyond an upfront cost issue or challenge, well into a thing of organisational culture. A lot of the resistance we see to the cloud computing model, or ‘the spirit of cloud’ comes from organisations that have found it difficult to change, first, their internal IT culture from CAPEX to OPEX; and this usually starts from the organisational leaders.
If organisations can begin to monitor their IT usage in terms of cost and security on the cloud, as they do their electricity and water usage, I believe that will be a first big step towards an organisational culture change regarding IT costs and spending. You can’t use old tools to model new systems, and cloud computing is definitely a new system.
IT Team Expertise and Resource Upskilling
Another challenge organisations have cited is the high cost associated with assessing the relevant cloud experts and resources needed to run a successful IT OPEX model. From my understanding of what cloud computing is, the relevant knowledge and expertise gap between traditional computing and cloud computing isn’t large enough not to invest in upskilling your already established IT teams; which takes me back to the issue being more of a culture problem than a cost one.
Organisations should upskill their IT teams with the necessary expertise, and give them the necessary tools needed to continuously monitor their IT usage on the cloud, especially in terms of cloud cost and security. Without this culture change and upskilling of IT teams, transitioning your IT business model from CAPEX to OPEX will be a very steep and unpleasant ride—you can’t use old tools to model new systems! .
WENDU AND OPEX
Creating a cloud computing OPEX culture, as we’ve already discussed needs a mix of organisational culture and necessary upskilling of IT teams with expertise and resources. The culture of continouous monitoring of both the security posture and usage of your IT resources and workloads on the cloud needs to be fully imbibed from top to bottom of the organisational structure.
Wendu, as a Cloud Security Posture Management and Cost Optimisation SaaS tool helps organisations ensure their IT resources and workloads on the cloud are security compliant, and lean and cost optimised.
With Wendu, you can begin the culture transition from CAPEX to OPEX by empowering your IT team with the ability to run a secure, lean, and cost optimised cloud environment, taking you far away from the ‘reverse migration’ movement which seems more like an IT FAD than cloud computing, as ‘they’ so claim.
Learn more about Wendu here, and you can also request a demo to see Wendu in action.