CapEx Vs OpEx: Cloud Computing

Gartner defines cloud computing as a style of computing in which scalable and elastic IT-enabled capabilities are delivered as a service using Internet technologies. So, an on-demand delivery of compute power, storage, applications and other resources through a cloud service platform via the internet.

Traditionally, IT expenses have been considered a Capital Expenditure (CapEx). Today, with the move to the cloud and the pay-as-you-go model, organizations have the ability to stretch their budgets and are shifting their IT CapEx costs to Operating Expenditures (OpEx) instead. This flexibility, in accounting terms, is now an option due to the “as a Service” model of purchasing software, cloud storage and other IT related resources.

Cloud computing made simple

When it comes to cloud computing, organizations now treat is as a utility like water: products or services supplied by a vendor that is paid for as you consume it. And while you and I may not know how to build or manage water treatment plants or distribution systems, we assume our vendor is providing us water that is safe and available when we need it. If we have guests staying with us and we need more water, we continue using water as often as we need it. We will simply pay for this increase in our next bill. The same can be said about cloud computing.

On the other hand, the traditional on premise model is usually limiting in terms of scalability – or you end up paying for extra capacity and resources you will only need for one month of the year. This model has high up-front costs to keep your business systems running, and organizations frequently must pay large annual sums for new hardware, software, licensing – along with the staff to protect and maintain it all.

But how does this affect the balance sheet? Here’s a brief overview.

The following are ways to utilize IT services under a monthly OpEx financing model:

Infrastructure-as-a-Service (IaaS)

    • : outsourcing to a data center in the cloud without investing in capacity, management and maintenance of it.

Software-as-a-Service (SaaS)

    • : centrally hosted applications that are delivered over the internet – as a service. Also called web-based software, on-demand software or hosted software.

Platform-as-a-Service (PaaS)

    : providing a platform in a cloud environment where you can develop, manage and deliver applications without managing servers, storage and networking.

IT-as-a-Service model

The outcome of the IT-as-a-Service model in the cloud is the same capacity and control like with an in-house IT team while eliminating the substantial upfront CAPEX investments and replacing it with the OPEX model with a predictable monthly or annual fee.

The perception that being responsible for operating millions of dollars in owned assets with the people and processes versus having an external partner managing these assets, is one of the reasons the CAPEX vs OPEX debate goes on. This debate should be more than just CAPEX vs OPEX, it should include other factors like agility, the Total Cost of Ownership in the cloud, the Return on Investment and identifying the savings.

The reality is that organizations want to pay for what they use and when they use it. Reduced ongoing costs allows businesses to better forecast and plan their budgets and cash flows without wasting excess capacity or CAPEX surprises hidden whenever any IT equipment fails.

Read more about Microsoft Azure where you’ll find the different ways to deploy cloud resources.

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