If you’re a member of upper management, you know the relationship between CFOs and CIOs can be … complicated. One is tasked with keeping expenses minimal and tax deductions maximal. The other has to keep the enterprise’s systems running smoothly and securely — an expensive undertaking as needs expand and technology continually evolves.
Recently these roles have begun finding common ground thanks to the growing use of third-party managed services. Organizations are recognizing that, if they outsource their hosting and software needs rather than building on-premise data centers, they can categorize their IT costs as operational expenses (OpEx) rather than capital expenses (CapEx).
And for CFOs and CIOs alike, shifting IT from CapEx to OpEx can be a huge win.
The difference between CapEx and OpEx
Purchasing and implementing on-premise IT infrastructure requires huge upfront expenses. Because these items are paid for all at once, CFOs categorize these costs on the books as capital expenses (CapEx). Some companies try to convert these upfront outlays into monthly expenses using leases, but they still require a long-term commitment for a fixed amount. With the added expense of buying out the leases at the end of the term if the company wants to keep the equipment.
When companies outsource their technology to a hosting provider and software-as-a-service (SaaS) companies, they incur smaller, but regular (usually monthly) fees, which can be categorized as ongoing operational expenditures (OpEx). There are a number of financial and reporting reasons that CFOs prefer lower, ongoing costs.
CapEx Pros and Cons: Good for public companies, bad for most others
It’s worth noting there’s one situation in which the CapEx model may still make sense. Public companies may prefer to swallow a one-time expense in the interest of keeping ongoing expenses smaller. The smaller their ongoing expenses, the better their bottom line looks to shareholders over time. Of course, this is only feasible if the company has large amounts of cash on hand or credit lines to facilitate the purchases.
For most companies, the goal is not to boost profits on paper; it’s to achieve the best overall balance of expenses and tax benefits.
The issue the CapEx model creates for CFOs is that:
- Upfront IT costs can strain budgetary resources
- The costs can’t all be claimed in the tax year they were incurred, but are rather carried forward in increments over a few years to show depreciation. This means the company is spending big money right now, but spreading their tax benefits for it over several years.
Moreover, there is still OpEx involved — companies must devote employee resources to managing the infrastructure and allocate maintenance fees. None of this is ideal for non-public organizations with finite resources.
OpEx: Reduced upfront costs, more flexibility in both expenses and configurations
Most non-public companies are finding the OpEx model is a solution that fulfills the needs of both the CFO and CIO. The CFO is happy about paying for IT in smaller, incremental payments and getting the full tax benefits as expenses are incurred.
The OpEx model reduces upfront costs and total cost of ownership (in most cases), because third-party vendors hold responsibility for keeping the infrastructure updated and secure, even as technology changes.
Meanwhile, CIOs are happy because they always have the latest technology, managed by a team of skilled professionals offsite while the CIO’s own team focuses on other priorities.
Another benefit of the OpEx model offered by public cloud is that these services are billed on a usage basis, rather than a fixed fee basis. If the company’s business goes through a downturn or is seasonal in nature, public cloud infrastructure can be easily adjusted and the spend will decrease accordingly, versus hardware purchases or leases that require a fixed outlay regardless of usage of the assets.
The CIO can easily scale up and change configurations without being stuck with hardware and software he’s already bought. This also makes prototyping and testing new environments much less costly than under a CapEx model.
Making the shift from CapEx to OpEx
Change is never easy, regardless of company size. If you’ve already built an on-premise infrastructure, the pain of “throwing away” hundreds of thousands of sunken dollars can seem unfathomable for many stakeholders.
Involving key decision makers, including the CEO and chief investors, in the shift to OpEx from day one can make them feel as if they have more ownership in the decision. Additionally, pushing stakeholders to look beyond sunken costs and recognize the long-term benefits of maintaining the most up-to-date IT infrastructure without future upfront expenses.
Challenge your team to ask themselves: what is the total cost of not doing anything at all, and falling behind the technological curve?
If you’re unsure of how to do a Total Cost of Ownership (TCO) analysis of your on-prem or colocated IT facilities, contact Codero to help analyze your in-house workloads and determine how you can gain the maximum performance and cost benefits.
The shift to OpEx is one of those rare situations that can present a clear win-win across all lines of business. Not only will it bridge the CFO-CIO divide, it will offer opportunities for growth and modernization that your company can’t afford to miss in today’s data-driven, IT-dependent world.