The introduction of cloud as-a-service products has changed the way IT organisations plan and manage investment expenditures associated with digital transformation initiatives. The traditional procurement model which involved spending large sums on physical hardware and software that gets depreciated over the useful life of the asset has shifted to a cloud driven model where costs are incurred based on actual usage.

In addition to the proliferation of pay-as-you-go models for technology investments, the way organisations recruit and manage labour resources needed to expand their technical expertise has changed as well. Companies have increasingly leveraged contractors and gig workers to help meet the ongoing demand for technical resources required to develop and implement new digital capabilities, efficiencies, and services. This new approach allows organisations to temporarily hire specialists on demand as their business needs change.

Before we dive into how cloud computing and the decentralised workforce have transformed the way companies invest in new technologies let’s review the two primary categories commonly used to classify business expenses.

Definitions

Capital Expenditures (CapEx)

CapEx is a term used to describe the procurement of goods and services that will be leveraged to improve the future performance of the business. For an expense to be classified as CapEx it must provide useful benefits for more than one year and is normally related to the one-time purchase of company facilities (data centre), equipment, software licenses, and additional maintenance used to extend the life of an asset. CapEx commonly includes to fixed assets that are depreciated over the span of 3-5 years or more. Some examples of fixed assets are servers, storage devices, printers, and company laptops.

Operating Expenses (OpEx)

Operating expenses are the costs of running daily business operations. OpEx consists of products/services that are continuously consumed and paid for that enable the business to generate revenue. OpEx purchases do not include anything considered to be a long-term investment since they are used within a year after the purchase date. Examples of operating expenses are cloud services, utilities, paper, subscriptions, leasing expenses, marketing fees, legal fees, and employee salaries.

Comparison: CapEx vs OpEx

Shifting to an OpEx Investment Model

The Cloud as-a-Service Boom

Cloud services have made it more economical to quickly expand IT infrastructure, deploy new capabilities, and leverage innovative new technologies. Companies are no longer locked into costly multi-year licensing agreements for new software that can quickly become obsolete. The introduction of Software-as-a-Service (SaaS) has allowed companies to implement new tools without the huge upfront investment or lead time. SaaS enables organisations to pay based on the amount of end user subscriptions consumed on a monthly or yearly basis while avoiding expenses required to secure data, maintain infrastructure, and manage software upgrades.

Cloud computing has allowed companies to swiftly scale resource capacity without the need for huge capital outlays traditionally used for new data centre facilities, servers, storage devices, and networking apparatus.  Platform-as-a-Service (PaaS) and Infrastructure-as-a-Service (IaaS) offerings give companies on-demand access to cloud infrastructure that can be switched on or off quickly as demand oscillates.

Budgeting for technology investments has transitioned from a guessing game where companies had to accurately forecast future IT resource consumption 5 years into the future or face capacity issues related to underutilised assets and bandwidth bottlenecks. The pay-as-you-go model for cloud services enables businesses to shift massive CapEx funds to investments that drive innovation, create customer value, and improve organisational agility.

Bringing in Tech Experts

A spike in demand for technical expertise has emerged from the new cloud-focused environment due to a multitude of cutting-edge tools and technologies that have been developed in the cloud. Companies have opted to recruit new talent from the growing pool of gig workers, consultants, and managed service providers instead of maintaining an internal workforce that appears on the P&L as a recurring expense.

Remote working has allowed businesses to acquire expertise from a decentralised, worldwide talent pool while only paying for labour expenses tied to initiatives that are currently in progress. These new modes of employment have given organisations to ability to rapidly scale their workforce based on the specific needs of the business at any point in time.

Before cloud computing, the long-established CapEx investment model required corporations to plan for additional headcount to help support and maintain IT assets in addition to capitalising internal labour used to develop new applications inhouse.

CapEx vs OpEx: Pitfalls & Opportunities

CapEx

The CapEx model for IT investments allows companies to fully own, control, and modify assets as they deem fit. This may be a more attractive approach for businesses that require a higher level of data security and availability. Full ownership requires additional funding to house, secure, maintain, and upgrade IT assets. Companies will have to budget for depreciation expenses 3 years or more into the future and the approval process for capital investment is typically more cumbersome than OpEx.

CapEx investment only provides the business with a limited technology footprint that is expensive to scale to meet increased demand. Companies in seasonal industries may experience wasted capacity or overutilisation due to significant changes in customer activity throughout the year. Technology assets may become outdate before the useful life has expired since the CapEx procurement cycle replaces old equipment every 3-5 years. Trying to calculate the total cost of ownership (TCO) for the CapEx assets is not as straight forward and may not include many hidden expenses.

OpEx

The OpEx model allows companies to invest in transformation and innovation quickly without a large, upfront investment. Cloud infrastructure can be scaled on demand based on the current consumption of technology resources. If managed correctly, companies can avoid wasted spend by leveraging the OpEx model and avoid costs related to maintaining physical data centres. Organisations can rapidly modify infrastructure on short notice which improves their ability to adapt during times of accelerated change in the competitive environment.

TCO for cloud based OpEx spend is transparent since the business is only paying for what they consume. Approving new technology investments is a speedier process than CapEx since the deployment costs are significantly lower and there isn’t a need to plan 5 years in advance. Many cloud services offer a significant discount if they are prepaid in advance.

Using a third-party cloud infrastructure limits the amount of control companies have over data security and systems availability. Costs can skyrocket due to surges in cloud utilisation if usage isn’t monitored on an ongoing basis. Long-term forecasting may become a challenge since consumption may change considerably month over month.