Many CFOs have noticed an important shift in their recent business financial reports–how technology costs are allocated. Traditionally, IT work was completed using internal staff and a long-term strategy for investment in hardware and software. Project implementers and infrastructure specialists managed everything from servers and workstations to Line of Business software systems. The cost of the staff was usually listed as an operating expense while the hardware and software were considered capital expenditures.
Operating Expenses (OpEx) are regular expenses for ongoing activities. These costs vary based on the project work for a given period. These expenses can have a direct impact on cash flow and profit. Capital Expenses (CapEx) are large purchases that are depreciated over several years allowing for the cost of the investment to be spread over the useful life of the item. CapEx expenses create less impact on cash flow because they provide ongoing tax benefits.
These spending and accounting trends have shifted with the advent of outsourced IT services, Software as a Service (SaaS), Platform as a Service (PaaS), Infrastructure as a Service (IaaS). These new options reduce the need for significant capital expenditures and shift costs to the OpEx side of the statement. The good news is that the change from a “buy it” to a “lease it” philosophy has reduced the burden to find large capital reserves for technology purchases. But, at the same time, this new approach has entirely changed the acquisition process—and the impact on cash flow.
The software industry has been steadily moving away from perpetual licensing because of difficulties in forecasting and managing upgrade cycles. Software vendors prefer to charge ongoing monthly fees and roll out improvements as they become available.
Equipment manufacturers have also moved into leasing large items to make it easier for growing companies to meet today’s short term goals. The recent emergence of Cloud providers has accelerated the trend even further toward OpEx purchasing because they provide scalable hardware solutions that can be expanded or reduced when an organization’s need changes. Businesses pay less when needs decrease and more to scale up when needs increase. Cloud vendors maintain extra capacity so scaling can be handled quickly. For companies that have changing use needs this approach works well because they only pay for what is actually used.
From a software standpoint, a major system can be a large upfront expenditure and buying new versions can also be costly. When business delay upgrades due to the additional cost they could experience slower employee productivity and increase security risk.
With the constant changes in computing environments, it may be time to review your business IT acquisition methodology. An overall review of your IT service delivery, support and development process could lead to the adoption of these newer purchasing models. Contact us to learn more about CapEx vs. OpEx and schedule a review of your technology environment.