Getting on the Right Side of the Capex vs Opex Divide


 

If you’re like most CIOs, you’re being asked to do more with less. Support more applications, more websites and more devices for more people... with less budget than last year. BUT HOW? This white paper can help, by:

  • Explaining why CIOs must think more like CFOs
  • Showing the difference between capital expenses and operating expenses
  • Suggesting an area where you can clearly do more with less.

THINK LIKE A CFO

“The CFO is increasingly becoming the top technology investment decision-maker in many organizations,” according to a recent study by Gartner and the Financial Executives Research Foundation. In nearly 500 enterprises surveyed, 42 percent of all CIOs report to the CFO, and in three out of four companies, the CFO has a major hand in all IT spending. Unfortunately, not all CIOs and CFOs work well together: By not accounting for one another’s viewpoints, they often fail to build a good working relationship.  

WHAT’S A CIO TO DO?

The study recommends this: “CIOs must understand the impact their CFOs have on technology decisions in their organizations, and ensure that they are... communicating the business value that can be achieved.” At a conference last fall, Gartner went even further. “2010 marks the year in which IT needs to demonstrate... business objectives for every investment,” said its analysts. “CIOs need to model the economic impact of IT on the overall financial performance of an organization.” For many CIOs, that’s a new way of looking at things. But why not start thinking more like a CFO? Why not find ways to stretch your IT budget like a CFO does?  

THE CAPEX VS. OPEX DIVIDE

One classic way to stretch your budget is to shift capital expenses to operating expenses. Not sure of the difference? Table 1 sums it up. As you can see, capital expenses are long-term investments. The drawback is that you pay all the money up-front, but you get the value back in a trickle over the next few years. On the other hand, operating expenses are pay-as-you-go. You pay by the month, and you get value every month.

TODAY, CAPEX IS OUT AND OPEX IS IN.

As a recent article in ComputerWorldUK put it, “In the pursuit of maintaining a lean balance sheet with optimum cash flow, boards are paring back on new capital investments (CapEx), opting wherever possible to fund projects from operating expenditures (OpEx) instead.” One reason for this is the rapid changes in technology. For example, new servers run faster, use less energy and provide more cores every year. It doesn’t make sense to sink money into equipment that’s surpassed by the very next model. The rapid rise of SaaS, outsourcing and managed operations shows that many things that were once do-it-yourself are now outsourced to service providers. Costs are reduced and shifted from capital expenses to operating expenses, which save money and look better on financial statements.  

AN EXAMPLE: BUYING A LASER PRINTER

Suppose a group of users complain they can’t get the 11x17-inch color printouts they need for trade shows. Your nearest color printer that can do the job is in another building half a mile away. Like a good CIO, you listen and propose to get them a new printer. Buying the printer means making a lump-sum capital expenditure. Of course, the printer will last longer than one year. So even though the cash to pay for it will be gone, your company won’t be able to expense that full cost this year. That asset will be carried on your company’s books for the next three years. If the printer costs $6,000 your company can claim $2,000 in expenses this year. Next year it can claim $2,000 in depreciation; then in Year 3 the final $2,000. What’s wrong with that? Nothing, if you have lots of money. But everything, when you’re under pressure to do more with less. When you propose this to your CFO, he will probably ask a lot of irritating questions:

  • How vital is that new printer?
  • Why can’t they get printouts delivered from the other building?
  • What if we spent that money on something else?

For example, if your company spends $6,000 more on marketing, that can generate more sales. That $6,000 cash could become $12,000 or $20,000 in income, which looks much better on the books than a $2,000 capital expense plus $4,000 in future depreciation. The point is: if it’s not tied up in a new laser printer, that money could be working harder for your organization.  

AN ALTERNATIVE: OUTSOURCING THE COLOR PRINTING

Suppose you find out your users need about 150 11x17-inch printouts a year, which they can get from an outside printing service for $4 a pop, with free delivery. That means they can get all the big color prints they need for $600 a year. This transforms a potential $6,000 capital expense into a $600 operating expense. Any CFO would prefer this option. Why? This saves your company $5,400 in cash to invest somewhere else, and it avoids carrying another $4,000 in depreciation for the next two years. Your users, perhaps with a little grumbling, will likely be satisfied. This is what Gartner means by modeling the economic impact of IT decisions on your company’s financial performance. CIOs who think this way are ready to form a powerful partnership with their CFOs.  

OUTSOURCING YOUR SERVER MANAGEMENT

To carry on this thinking, here’s an area where most IT departments can easily do more with less: outsourcing your server management. Before you reject this idea, consider about these comments from CIO magazine.

“As one colleague who consults on financial strategy with many large companies said, ‘You know what we think of IT? We think it shows up, spouts unintelligible jargon, and asks for huge lumps of cash...’ “It’s easy to understand why any initiative that promises to reduce lumpy capital investment and transform it into smoother operational expenditure would be extremely attractive to bean counters.”

If your CFO could save money on servers, push capital expenses into operating expenses, and get the same level of service for your users, would he be interested? Of course he would. So why not consider this yourself, instead of waiting for him to suggest it?

Today you can move to an innovative form of outsourcing—managed colocation – that takes care of all your hardware. It still leaves you in control of the things that matter most: your OS and software apps. And it cuts several items from your budget and transforms a large amount of CapEx into OpEx.

Table 2 lays out the differences between do-it-yourself server management, traditional colocation and the Managed Colocation available from a vendor like Rackspace.

Capital expenses are shaded in grey; operating expenses are not shaded. Dollars are estimated, where $$$$$ is a lot and $ is a little. In the column for managed colocation, notice all the areas that are already included—and the total absence of any shaded capital expenses. Moving to this pay-as-you-go option, with a strict Service Level Agreement, will certainly help you do more with less. You’ll have less headaches from middle-of-the-night hardware failures, too. And this will enable you, if you want, to use new servers every year, so that your equipment also does more with less. More and more CIOs today think that’s a win-win situation; and so do their CFOs.

 



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