Welcome!

Virtualization Authors: Trevor Parsons, Carmen Gonzalez, ITinvolve Blog, Liz McMillan, Vormetric Blog

Related Topics: Cloud Expo, SOA & WOA, .NET, Virtualization, Apache, Security

Cloud Expo: 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
In their session at @ThingsExpo, Shyam Varan Nath, Principal Architect at GE, and Ibrahim Gokcen, who leads GE's advanced IoT analytics, focused on the Internet of Things / Industrial Internet and how to make it operational for business end-users. Learn about the challenges posed by machine and sensor data and how to marry it with enterprise data. They also discussed the tips and tricks to provide the Industrial Internet as an end-user consumable service using Big Data Analytics and Industrial Cloud.
How do APIs and IoT relate? The answer is not as simple as merely adding an API on top of a dumb device, but rather about understanding the architectural patterns for implementing an IoT fabric. There are typically two or three trends: Exposing the device to a management framework Exposing that management framework to a business centric logic Exposing that business layer and data to end users. This last trend is the IoT stack, which involves a new shift in the separation of what stuff happens, where data lives and where the interface lies. For instance, it's a mix of architectural styles ...
IoT is still a vague buzzword for many people. In his session at @ThingsExpo, Mike Kavis, Vice President & Principal Cloud Architect at Cloud Technology Partners, discussed the business value of IoT that goes far beyond the general public's perception that IoT is all about wearables and home consumer services. He also discussed how IoT is perceived by investors and how venture capitalist access this space. Other topics discussed were barriers to success, what is new, what is old, and what the future may hold. Mike Kavis is Vice President & Principal Cloud Architect at Cloud Technology Pa...
Dale Kim is the Director of Industry Solutions at MapR. His background includes a variety of technical and management roles at information technology companies. While his experience includes work with relational databases, much of his career pertains to non-relational data in the areas of search, content management, and NoSQL, and includes senior roles in technical marketing, sales engineering, and support engineering. Dale holds an MBA from Santa Clara University, and a BA in Computer Science from the University of California, Berkeley.
The Internet of Things (IoT) is rapidly in the process of breaking from its heretofore relatively obscure enterprise applications (such as plant floor control and supply chain management) and going mainstream into the consumer space. More and more creative folks are interconnecting everyday products such as household items, mobile devices, appliances and cars, and unleashing new and imaginative scenarios. We are seeing a lot of excitement around applications in home automation, personal fitness, and in-car entertainment and this excitement will bleed into other areas. On the commercial side, m...
Almost everyone sees the potential of Internet of Things but how can businesses truly unlock that potential. The key will be in the ability to discover business insight in the midst of an ocean of Big Data generated from billions of embedded devices via Systems of Discover. Businesses will also need to ensure that they can sustain that insight by leveraging the cloud for global reach, scale and elasticity.
The 3rd International Internet of @ThingsExpo, co-located with the 16th International Cloud Expo - to be held June 9-11, 2015, at the Javits Center in New York City, NY - announces that its Call for Papers is now open. The Internet of Things (IoT) is the biggest idea since the creation of the Worldwide Web more than 20 years ago.
"People are a lot more knowledgeable about APIs now. There are two types of people who work with APIs - IT people who want to use APIs for something internal and the product managers who want to do something outside APIs for people to connect to them," explained Roberto Medrano, Executive Vice President at SOA Software, in this SYS-CON.tv interview at Cloud Expo, held Nov 4–6, 2014, at the Santa Clara Convention Center in Santa Clara, CA.
Performance is the intersection of power, agility, control, and choice. If you value performance, and more specifically consistent performance, you need to look beyond simple virtualized compute. Many factors need to be considered to create a truly performant environment. In his General Session at 15th Cloud Expo, Harold Hannon, Sr. Software Architect at SoftLayer, discussed how to take advantage of a multitude of compute options and platform features to make cloud the cornerstone of your online presence.
SYS-CON Media announced that Splunk, a provider of the leading software platform for real-time Operational Intelligence, has launched an ad campaign on Big Data Journal. Splunk software and cloud services enable organizations to search, monitor, analyze and visualize machine-generated big data coming from websites, applications, servers, networks, sensors and mobile devices. The ads focus on delivering ROI - how improved uptime delivered $6M in annual ROI, improving customer operations by mining large volumes of unstructured data, and how data tracking delivers uptime when it matters most.
Cultural, regulatory, environmental, political and economic (CREPE) conditions over the past decade are creating cross-industry solution spaces that require processes and technologies from both the Internet of Things (IoT), and Data Management and Analytics (DMA). These solution spaces are evolving into Sensor Analytics Ecosystems (SAE) that represent significant new opportunities for organizations of all types. Public Utilities throughout the world, providing electricity, natural gas and water, are pursuing SmartGrid initiatives that represent one of the more mature examples of SAE. We have s...
Since 2008 and for the first time in history, more than half of humans live in urban areas, urging cities to become “smart.” Today, cities can leverage the wide availability of smartphones combined with new technologies such as Beacons or NFC to connect their urban furniture and environment to create citizen-first services that improve transportation, way-finding and information delivery. In her session at @ThingsExpo, Laetitia Gazel-Anthoine, CEO of Connecthings, will focus on successful use cases.
The Internet of Things will greatly expand the opportunities for data collection and new business models driven off of that data. In her session at @ThingsExpo, Esmeralda Swartz, CMO of MetraTech, discussed how for this to be effective you not only need to have infrastructure and operational models capable of utilizing this new phenomenon, but increasingly service providers will need to convince a skeptical public to participate. Get ready to show them the money!
DevOps Summit 2015 New York, co-located with the 16th International Cloud Expo - to be held June 9-11, 2015, at the Javits Center in New York City, NY - announces that it is now accepting Keynote Proposals. The widespread success of cloud computing is driving the DevOps revolution in enterprise IT. Now as never before, development teams must communicate and collaborate in a dynamic, 24/7/365 environment. There is no time to wait for long development cycles that produce software that is obsolete at launch. DevOps may be disruptive, but it is essential.
“With easy-to-use SDKs for Atmel’s platforms, IoT developers can now reap the benefits of realtime communication, and bypass the security pitfalls and configuration complexities that put IoT deployments at risk,” said Todd Greene, founder & CEO of PubNub. PubNub will team with Atmel at CES 2015 to launch full SDK support for Atmel’s MCU, MPU, and Wireless SoC platforms. Atmel developers now have access to PubNub’s secure Publish/Subscribe messaging with guaranteed ¼ second latencies across PubNub’s 14 global points-of-presence. PubNub delivers secure communication through firewalls, proxy ser...
The industrial software market has treated data with the mentality of “collect everything now, worry about how to use it later.” We now find ourselves buried in data, with the pervasive connectivity of the (Industrial) Internet of Things only piling on more numbers. There’s too much data and not enough information. In his session at @ThingsExpo, Bob Gates, Global Marketing Director, GE’s Intelligent Platforms business, to discuss how realizing the power of IoT, software developers are now focused on understanding how industrial data can create intelligence for industrial operations. Imagine ...
The true value of the Internet of Things (IoT) lies not just in the data, but through the services that protect the data, perform the analysis and present findings in a usable way. With many IoT elements rooted in traditional IT components, Big Data and IoT isn’t just a play for enterprise. In fact, the IoT presents SMBs with the prospect of launching entirely new activities and exploring innovative areas. CompTIA research identifies several areas where IoT is expected to have the greatest impact.
The 3rd International Internet of @ThingsExpo, co-located with the 16th International Cloud Expo - to be held June 9-11, 2015, at the Javits Center in New York City, NY - announces that its Call for Papers is now open. The Internet of Things (IoT) is the biggest idea since the creation of the Worldwide Web more than 20 years ago.
The Internet of Things promises to transform businesses (and lives), but navigating the business and technical path to success can be difficult to understand. In his session at @ThingsExpo, Sean Lorenz, Technical Product Manager for Xively at LogMeIn, demonstrated how to approach creating broadly successful connected customer solutions using real world business transformation studies including New England BioLabs and more.
Connected devices and the Internet of Things are getting significant momentum in 2014. In his session at Internet of @ThingsExpo, Jim Hunter, Chief Scientist & Technology Evangelist at Greenwave Systems, examined three key elements that together will drive mass adoption of the IoT before the end of 2015. The first element is the recent advent of robust open source protocols (like AllJoyn and WebRTC) that facilitate M2M communication. The second is broad availability of flexible, cost-effective storage designed to handle the massive surge in back-end data in a world where timely analytics is e...