May 9, 2016

What’s the difference between CapEx and OpEx?

By Kirk Bohn
Cloud Services Enablement Leader
Arrow ECS

Cloud computing and “as-a-Service” services have dramatically shifted the mindset of companies and the way IT departments obtain IT compute and storage services. With this shift in the way these services are consumed, also comes the need to understand some of the rationale on why IT and CFOs make decisions on procuring compute infrastructure needs. Cloud computing has changed the conversation, and a savvy IT consultant needs to understand how the pieces fit together… specifically the Capital Expense (CapEx) vs. Operating Expense (OpEx) details.

Definining CapEx and OpEx

CapEx is a term used in accounting and, in simple terms, means spending money on a physical resource that needs to be amortized, typically 3-5 years. To break that down a bit more, let’s say you need a new office building and expect to use it for several years. According to accounting rules, you can’t just deduct the full cost of the office the first year; you get to deduct a little portion of the cost every year. That’s called amortizing.

Quote CapEx vs OpEx

In contrast to CapEx (which again, has to be amortized over a few years), OpEx is an upfront investment that allows a business to make payments on goods or services – all the while only paying for what they consume. Think of it in terms of renting a car. If you only need a car for a week, you can purchase (rent) a week’s worth of time and, at the end of that week, return the car. You only pay for the week that you use the car and not for the car in its entirety. Keep in mind also that with CapEx, you need to maintain the asset and fund the operations associated with it. In an OpEx model, typically that maintenance expense is built into the as-a-service cost. Just like the car example we previously discussed: If you own the car, you are responsible for the oil change; if you rent the car for a week, the oil change isn’t your responsibility.

To summarize, typical CapEx items are a major investment in a good, which is accounted for on the balance sheet and is depreciated over the life of the good. OpEx ends up on the P&L and accounts for ongoing expenses as they are incurred and doesn’t affect the balance sheet. The key here for OpEx is “as they are incurred,” i.e., you only pay for what you need, when you need it. One final important consideration for the determination of CapEx vs. OpEx is that OpEx is tax deductible and CapEx expenses are not.

Understanding Technology Spend

For an IT consultant in today’s market, understanding how technology is consumed is an important factor in developing the right solution for your client. Now, more than ever, an increased understanding of how technology spend is managed in your client’s environment is also a critical component in developing Cloud solutions. Many companies that need to invest in an IT infrastructure are usually limited on the amount of capital they have available to spend in general, and they typically want to direct that money toward revenue-generating processes. So it makes sense that as IT procurement has matured, leasing has become an attractive option rather than purchasing physical hardware, thus preserving important capital reserves.

Balancing workloads - scale with rocks

Weighing the Costs

Utilizing Cloud computing and as-a-Service options for IT departments is the next step in the IT procurement process, and it makes sense, especially from the CXO point of view. Why spend money on physical IT assets, when you can pay for just what you use, while preserving capital dollars? This could absolutely be seen as a competitive business advantage to many companies. Utilizing capital dollars to outsell, out-innovate, and outperform your competitors while using your OpEx money to run your business’s IT functions could make a huge competitive differentiator in an already competitive business market.

Weighing Your Options

The Cloud and as-a-Service offerings are seemingly always changing. As the IT infrastructure procurement models evolve from creating on-site private Clouds to combining private and public Cloud infrastructure for non-essential workloads – there are a lot of options to consider. Everything from using CapEx dollars, leasing the IT equipment, or utilizing OpEx dollars are all options that should be considered when developing solutions.

Let Arrow Help

One of the value adds a distribution partner such as Arrow can bring to the table are alternatives and education around IT and Cloud procurement. By leveraging Arrow – your Value Add Distributor (VAD) – you can not only educate yourself about various Cloud options and solutions, but also our full line of services can provide information around various scenarios, case studies, and leasing options of on-site private Cloud infrastructures.

Contact Us

For more information about your Cloud procurement options and other value-add cloud resources contact ECSCloudServices@arrow.com or 877.558.6677.