Capex versus Opex: why the move to the cloud pays off

Cloud computing has taken a remarkable place in the IT industry in a short time. This is because cloud computing brings many features and benefits that can help businesses and users manage their data efficiently.

Cloud computing has disruptively changed the IT world. In the past, significant investments were required to set up and run one’s own data center. Companies needed a large amount of hardware, such as dedicated servers and trained staff to run the system and keep it running smoothly around the clock. The IT departments operated and monitored the company’s servers and databases. The Capex system proved to be an expensive and sluggish system with the rise of the cloud.

We will now discuss how Capex can transform into Opex spend and the financial benefits it offers. Comparing Capex and Opex will also help us understand why cloud computing is beneficial to the industry. No business or company can develop in the long term without the help of modern technology.

Differences in costs between Capex and Opex

Digitalization is increasingly transforming physical investments into investments in digital goods and services. In finance departments, the IT budget is therefore increasingly becoming the focus of procurement. Short-term cost reduction is now a decisive factor for SMEs to large corporations when it comes to software procurement and the associated operation. Despite budget cuts and cost pressure, however, indeed, companies can only survive in the future competition and achieve their digitalization goals with a robust IT backbone.

Increasingly, therefore, business practices are shifting from Capex to Opex. As a result, an organization today has the flexibility to source its software according to its business needs. This shift significantly reduces capital expenditure because large parts of the physical infrastructure, such as servers, server rooms, or appropriately trained personnel, can be eliminated. The cost for the software investment thus shifts from one-off, expensive capital expenditure that appears in a company’s assets as tied-up capital to flexible consumption-based, monthly operating costs – basically as a kind of subscription service. Since the establishment of cloud technology and the accompanying cost transformation through as-a-service offerings, this service offering is also rising sharply in other sectors. New as-a-service business models are emerging – from software-as-a-service to device-as-a-service to innovation-as-a-service.

The frequent view that Capex makes more sense in the IT environment because it is a one-off and thus completed expenditure and the investment is also a sign of the company’s health is wrong. This is because the capital expenditure does not necessarily shift to the operating costs in the same amount. After all, a decisive advantage of cloud solutions is their scalability and the flexibility that goes with it. Thus, companies have a newly won freedom to decide to what extent they obtain software and which components are necessary for successful business operations and which are not. Unlike Opex investments, Capex investments are usually costly and cannot simply be replaced after implementation. Therefore, you are tied to your investment for the long term, which makes you very sluggish in IT operations and not as agile as is the case with Opex costs. After all, when new technologies make their way into IT, flexibility and scalability is decisive advantage.  Given the rapid speed of technical innovations, supposedly one-off capital expenditure (Capex) can quickly become permanent and develop into regular and unforeseen follow-up expenditure.

By using cloud computing, the investment risk can be significantly reduced, because an initially high capital expenditure is not incurred in the first place. Often, such capital expenditures are only refinanced much later or possibly not at all; cloud solutions thus have a faster effect on the result.

Which is more economical: Capex or Opex?

Whenever an organization tries to introduce a new IT technology, it weighs its benefits against the costs. It is not a question of the integrity of the business data and how much the IT department needs to operate or maintain it safely. It comes down to the needs of the business, not the cost. Companies need to weigh which investment is beneficial and what return it will bring to your business.

Capex and Opex investments each have their beneficial features. Cloud or Opex computing is relatively quick and flexible to deploy. Capex investments, on the other hand, make sense when it comes to very long-term goals. However, they only pay off after quite a long time. This is precisely where the problem lies with IT solutions such as software. Due to rapid technological progress, it is difficult to predict how long technology will be powerful enough for progressive digitization and when it may be necessary to switch to new technology or software. These concerns are a thing of the past with Opex operations, as the latest software from the provider is always available to you.

However, it should not be neglected that implementing an IT system is always the decision of both departments (purchasing and IT). They evaluate which investment is made according to various factors such as the system’s stability, flexibility, and future viability.

The disadvantages of Capex investments:

• Capex investments are risky because they are a bet on the future, and technologies change quickly
• Capex investments tie-up company capital for the long term, which is no longer available for short-term investment decisions
• Companies are locked into the IT resources they acquire for the long term
• Trained and reliable personnel are needed to administer and maintain IT systems independently
• Scalability of in-house IT resources is complicated and very costly
• The introduction of a new system requires a detailed plan before it is implemented Organizations need to focus on the need rather than the trend of IT change.
• Organizations are very dependent on internal expertise for Capex investments. If employees with a lot of knowledge leave the company, this can put your company at significant risk.

“Opex services are considered best suited to modern business needs. They are fast and flexible with lower costs.”

Opex resources are being used increasingly as companies are not as dependent on internal resources. The drawbacks of the Capex system increase the need for a plan like Opex. The cloud feature has bridged this gap and solved many challenges in a reliable manner.

The benefits of Opex investments:

• Opex costs create more flexibility for your business and reduce a lot of risks. You are not tied to your IT infrastructure and resources, and your technology is always up to date
• You have significantly less administration work, as primary network and device maintenance for your employees is eliminated, allowing your employees to focus on other things that contribute to the company’s success
• The services can be provided at short notice and do not require long lead times for deployment and operation. This can save you a tremendous amount of time and, therefore, money
• If a provider or service turns out to be unsuitable for your business, you can act at short notice and are not tied to existing resources and systems in the long term. This means less cost and investment risk for you
• Opex operating models give your business significantly more agility and speed, which benefits your entire organization
• Consumption-based costs mean you only pay for what you need while having the ability to scale software quickly and easily