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CAPEX vs OPEX

Financial Strategies for Tech Infrastructure: Choosing your next EX

CAPEX or OPEX is always a big consideration when you’re talking tech infrastructure. The cost can quickly add up when you’re updating your data centers—especially if you’re outfitting your technology stack (networking, core storage and compute) all at the same time.

More and more these days, Level Solutions Group is helping clients conceptualize the cost of equipment in terms of CAPEX and OPEX. That is to say, as a capital expense versus an operating expense.

CAPEX or OPEX?

When it comes down to it, the question is: Is digital infrastructure something that a business should purchase outright, or would shifting the cost to a smaller, recurring fee—itemizing it as an operating expense—make more sense? It is also key to align technology spend to the business’ financial consumption goals and preferences.

To be perfectly honest this one doesn’t have a silver bullet solution. There’s no one answer that can satisfy every business’ needs. Between CAPEX and OPEX, each approach has its own advantages in different situations. The current trend we are seeing is for vendors and clients to adopt a subscription-based model to satisfy their needs.

The Case for Buying

Let’s start with the CAPEX approach—treating digital infrastructure as a capital expense.

Obviously, the advantages of CAPEX are going to align pretty closely with the advantages of owning any other product. The organization owns the hardware and has total control over its use, location and disposition. And ultimately, your business has the final say on what happens with your gear when you’re the ones who bought it.

But at the same time, the buck stops with you, too. So any maintenance and upgrades will fall entirely on your lap.
CFO’s have long preferred capital expenditures because they can take advantage of amortization and depreciation of the investment over an extended period of time. The spend is consistent, predictable and typically results in higher ROI due to a longer life cycle.

Fulfilling your technology needs through CAPEX will require accurate forecasting to ensure your capabilities can handle the ebbs and flows of your business. The large upfront expense also generally requires several layers of executive approval, which always takes time.

The Case for OPEX

The other financing model we talk about is OPEX, treating your compute processing, and networking needs as an operating expense. There are a few different flavors of OPEX out there.

Some OPEX approaches look like a standard lease agreement, while others are closer to a subscription service. There are even consumption-based versions of OPEX financing, where a business only pays for the services when they use them.

So, what can your business gain when you treat your data center solutions as an operating expense? Agility.

With the speed of technology these days, it can be hard to constantly keep up with the latest and greatest in technology capabilities. When you itemize your infrastructure as an operating expense, you’ve got a built-in refresh cycle available to you. When the lease or subscription cycle ends, you’re free to sample the new products on the market.

There are no sunk costs to worry about either. You can keep your technology needs on an aggressive upgrade schedule without devoting a great deal of IT man hours or up-front capital to it.

In fact, when you treat the infrastructure like an operational expense, you can end up saving money. If you’re on a three-year lease (pretty standard in the industry) or signing-up for a subscription-based model, it can be more cost-effective and efficient to pay a small monthly fee than it is to pay once upfront, depending on the lifecycle of your technology.

It should be noted, there’s some innate uncertainty with an OPEX approach, especially for consumption-based models. Unexpected spikes in business volume could result in greater needs, increasing your monthly costs. Of course, on the flip side, that same model will see lower bills during slower months, avoiding unnecessary overhead during business lulls.

Choosing Your Next — EX

As you can see, there’s no one-size-fits-all solution for technology financing—and it can be hard to tell which direction is right for you.

Good news: One of Level’s core competencies, our bread and butter, is guidance through exactly this sort of conundrum. We excel in helping clients understand the benefits of distinct choices when discovering digital solutions and, ultimately, determine which approach is the right fit for their business needs.

For our clients, this means easier decisions, better solutions and quicker turnaround.

When it’s time for your company to talk about data center infrastructure modernization, give us a call. We’ll get you to the next level.