CapEx vs. OpEx – The IaaS Era

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Originally published at www.thewhir.com

During the WHD.global event in Rust, Germany, I had a chance to participate in a panel discussion regarding a topic that is very familiar to IT service providers: “CapEx vs. OpEx: why are hosters increasingly moving to an OpEx model?” We spoke about the reasons why IT companies have moved away from making capital investments into IT infrastructure and started to lean more often into letting specialized third-parties deal with data centers and hardware CapEx, while they move into an OpEx model regarding these assets. If you missed it, and are in the hosting business, I would like to share with you my take on the subject which should resonate not just with hosting providers but with any business that heavily utilizes IT infrastructure.

The CapEx vs. OpEx discussion is not always as black and white as the title of this article might indicate. Capital and Operational Expenditures are financial terms and relate directly to the way businesses allocate their financial assets. In many cases financial departments might prefer one over the other due to certain benefits, for example, writing off costs and paying fewer taxes, or avoiding investment of their assets or taking out loans altogether. Whatever the reasons that might be driving the financial departments, I’d like to take a look at the ins and outs for avoiding investing your business capital in IT infrastructure from the operational, agility and innovation point of view instead.

Starting with a famous quote from Infor’s CEO Charles Phillips:

“Friends don’t let friends build data centers”

which carries a tremendous amount of hidden value and truth; we can apply this logic to not only building and operating data centers, but also investing in and owning massive amounts of hardware.

Market always changes

Technology has become such an enabler that today’s businesses are not only able to gather, process and analyze massive amounts of data, but to use this data to see immediate changes in the market and make reasonably accurate predictions in market trends. In order to play into these changes and capitalize on them, your company needs to have the ability to respond quickly to such changes. This type of agility comes mainly from couple of sources: one being the way your company is set-up to respond rapidly on the organizational and structural level and the other is access to capital that can be retrieved quickly to make needed changes and react to market needs, preferably much quicker than your competitors. Business agility from the financial point of view would require your company to not only consider the OpEx model but actually adopt it, at least at some level as a company to avoid allocation of your assets into data centers and/or hardware.

What business are you in?

If you need to, ask why would you want to do such thing. Why would I want to part from ownership of a data center or hardware? Well the answer is simple: you wouldn’t if you are in the data center business and/or in selling hardware business, but if you are a hosting company or any company relying heavily on IT infrastructure for that matter, it makes little sense to spend massive amounts of capital on building, maintaining and operating data centers. The costs of such investments are significant and its best left to specialists that do this exclusively.

The same applies to hardware. If your business is not based on selling or leasing hardware, but rather focuses on providing customers with hosting solutions and services, you could use the capital on R&D, marketing, sales, training and more experienced staff instead of purchasing thousands of servers and dealing with hardware maintenance and degradation.

While to the technical departments parting with the hardware and DC ownerships might be a challenge on emotional level, there is no room for sentiments when dealing with cut-throat competition in today’s market.

Economies of scale

IT infrastructure has become a commodity and there are plenty of companies on the market that provide Infrastructure-as-a-Service (IaaS) on demand and tailored to fit your business needs. Such providers more often than not specialize in offering this type of services and because this is their core business they can fully leverage the benefits of economies of scale when purchasing hardware or building facilities. Their sheer size and numbers allow them to drive the costs down at an amazing pace and as a result we have been witnessing the “race to zero” in the public cloud computing sector of IaaS providers. At this stage, unless you are an IaaS provider, it makes little sense to invest in infrastructure when you can either rent it on demand or simply lease it and remain in full control over your hardware, and data. This control also enables you to remain fully compliant while avoiding any serious investments and lengthy contracts while at the same time providing your business with agility that you might not have seen before.

How to deal?

If history has thought us anything, and it has been trying to pass a message for many centuries: the species that survive are not the strongest, toughest or fastest but the ones that can adapt best. So taking this hard lesson into account your business strategy should be aimed at moving to the OpEx type of operation on the IT infrastructure side for maximum business agility. This should free some of your assets to focus in innovation and expertise. Don’t own anything that needs to be replaced or discarded quickly if the market shifts at a moment’s notice. This type of agility will let you refocus on your core business and strengthen your competitive position. Let your business stay lean and mean.

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