What is the difference between OpEx versus CapEx technology spending? Established enterprises have traditionally funded their data storage facilities through capital expenditures (CapEx). Companies purchased or leased their own servers, software, and storage units, along with the physical facilities required to house them, and paid for them up front through capital spending.
But, with the functionality and cost-effectiveness of cloud-based services expanding at a rapid rate, a growing number of companies have begun to reassess whether the CapEx approach is really best for them. Many have discovered that by using a STaaS (Storage as a Service) vendor like Zadara Storage, and funding provision of their data storage as an operating expense (OpEx) rather than through capital expenditures, actually leads to a better ROI.
OpEx vs. CapEx: Side by Side Comparison — Which is Better for Your Business? Download the Infographic
If C-Suite executives in your company are beginning to explore the advantages of an OpEx approach to IT funding, here are some considerations they should be aware of.
OpEx Versus CapEx Technology Spending: The Case for OpEx
Using OpEx rather than CapEx storage to meet your company’s data storage requirements provides some significant advantages. These include:
1. Lower Capital Costs
The capital costs associated with setting up and maintaining a company’s own data center are not insignificant. Every computer, every server, every data storage unit, and all the software required to run them, must be purchased up front. Ensuring that you have sufficient capacity to meet the company’s needs in coming years requires a significant investment of time, money and management attention to accurately forecast how much capital equipment must be acquired now and at various points in the future.
A factor that must not be neglected is the provision of reserve capacity that may be needed if demand unexpectedly expands faster than you planned for. This means that a portion of your initial capital expenditures must be devoted to acquiring assets you don’t expect to actually use for some time. In other words, that money buys capacity that may sit idle for years.
On the other hand, with the STaaS approach, Zadara bears the costs of acquiring capital assets. Your company is billed on a monthly basis only for the amount of storage you actually use. Thus, your capital expenditures are much less than if you have to pay for those assets up front.
2. Lower TCO and Higher ROI
A common misconception when comparing CapEx with OpEx (as-a-service) models is that an OpEx model will cost just as much in the long run because you are simply “spreading the cost” over many years. What is missed in this analysis is the economies of scale. A single customer purchasing hardware will not gain the economies of scale that vendors offering OpEx models gain. Think of other services that have transitioned to utility grids. Would it make sense to generate your own power, water, electricity or cell phone coverage? Of course not. It would be cost-prohibitive. We purchase these services from utility companies because it is more cost effective. OpEx-based as-a-service models work the same way. A single vendor can gain the economies of scale that individual users cannot.
What such comparisons also miss, is the fact that along with the up-front capital costs of equipping and maintaining a data center, a company using the CapEx model will also incur significant operational costs. For example, the energy required both to run the equipment and to cool it, the replacement of hardware that fails or becomes outmoded, the salaries and benefits of the personnel required to manage and maintain the facility, are all costs that must be borne on an ongoing basis, in addition to the initial capital outlay.
Additionally, with as-a-service offerings, you never over-provision. You only pay for what you use, so you eliminate the costs of paying for unused capacity that sits as a buffer in case you need to expand and grow.
When all the costs associated with running its own data center are accurately accounted for, most companies discover that TCO is significantly lower, and ROI is clearly higher with the OpEx approach.
3. Greater Flexibility and Agility
As Bernard Golden, CEO of consulting firm HyperStratus, has said, “Once you have purchased a capital good, you’re stuck with it.” With technology advancing at an ever-growing pace, equipment that was state-of-the-art when purchased may be totally outmoded within just a year or two. But if that equipment was acquired as a capital asset, it often cannot be quickly replaced or upgraded when more advanced versions become available. You can easily find yourself locked into yesterday’s technology.
The same considerations come into play when there are rapid changes in the business environment your company faces. New opportunities may open up very suddenly, requiring that your company have the agility to quickly respond if you are to take advantage of them. But if your ability to quickly increase your data storage capacity in order to meet suddenly expanding requirements is constrained by a limited CapEx budget, your company may eventually find itself slipping further and further behind the curve.
4. Greater Focus On Core Business Functions
If you are running your own data center on a CapEx model, a significant percentage of your staff must be devoted to keeping that facility functional. However, with the OpEx/STaaS approach, the vendor carries that responsibility. That releases your staff to focus on the core functions of your business that actually produce revenue.
The same can be said of the funds devoted to capital expenditures. These can usually be much better employed in acquiring assets that directly produce revenue for your business than in funding infrastructure to provide services that could be obtained as a monthly expense.
Most C-Suite executives are very open to initiatives that can be shown to improve operational efficiency, save the company money, and help it achieve its business goals in an ever-changing and challenging environment. Case studies based on the considerations outlined above may well encourage the C-Suite in your company to seriously consider moving from a CapEx to an OpEx model in providing for the enterprise’s data storage needs.