If you are planning to switch from traditional IT infrastructure to a cloud computing one, which we absolutely recommend you do, then you should also rethink how you handle all these cloud costs.
This means you need to choose if you want to have this cost as a capital expenditure (CapEx), as this works for most traditional IT environments, or go for a pay-as-you-go option, with no upfront payments for your cloud services.
In case you’re not sure which way to go, then we hope this article will help you make the right decision for your business.
So, read on to find out what’s the difference between CapEx and OpEx for Cloud services and some examples to help you decide.
What does CapEx mean for Cloud services?
CapEx or capital expenditure is the initial cost a business spends on physical infrastructure, in our case, IT infrastructure, as these will provide benefits beyond the current year. This up-front cost is then deducted over time, which means its value reduces over time.
In other words, all those expenses that are usually seen as long-term investments and increase their value over time are most of the times placed under CapEx. So, traditionally, CapEx IT spending has been often seen as a one-time purchase of a specific fixed high-ticket asset during a single tax year.
Now, here are some examples of CapEx expenditure in the cloud:
- Building/premises purchase
- Physical data center equipment like servers and networking infrastructure
- IT equipment for IT and office staff
- Installing local software or in-house applications
- Data Center renovation
- Restoring an asset’s value through upgrades
- Repurposing an asset
- Setup and supporting infrastructure costs
- Repairs beyond routine maintenance
Now, let’s see what operating expenses mean for the cloud services and how are they different from CapEx?
What does OpEx mean for Cloud services?
OpEx, also known as operational expenses or operating costs, refers most of the time to pay-as-you-go services. It’s the cost your business has for running day-to-day operations. This expense can be deducted in the same year you spend it and there is also no up-front cost, as you pay for a service or product as you use it. So, as you can probably tell from its name, OpEx is the expense of daily operations.
Some examples of OpEx expenses in the cloud:
- Yearly service or maintenance agreements that require a subscription fee, such as cloud-based services such as SaaS, IaaS, PaaS, and DaaS
- Property leasing, such as leasing IT infrastructure on Amazon Web Services (AWS) for a monthly fee
- Ongoing web hosting
- Annual IT infrastructure maintenance agreements
- Software support
- General repair and IT infrastructure maintenance fees
Differences between CapEx and OpEx for Cloud services
To help you see the big picture here’s a basic comparison of OpEx vs. CapEx spending.
|CapEx / Capital expenditure||OpEx / Operating expenses|
|The upfront cost||Significant||None|
|Ongoing cost||Low or non||Based on usage|
|Amount paid||Huge investments||Relatively small, ongoing payments (monthly, quarterly, annually)|
|Ownership and responsibility||Transfers ownership to the buyer, including full responsibility and control, including access and building updates for both owned hardware and software.||Your cloud provider is responsible for system updates, upgrades, and replacements for hardware and software.|
|Value over time||Lowers||No change|
To sum up
Traditional IT costs are most of the time predictable and relatively fixed, that’s why a business tends to purchase this type of infrastructure upfront and use it over time. This setup makes it easier to calculate the total cost of ownership.
With cloud computing, things are a bit different, as this type of setup can also operate on a pay-as-you-go basis, with no or low upfront payments. If you choose this option, you have access to resources and services on-demand, and your IT expenses are based on consumption.
So, when choosing the CapEx model you have stability, as you know exactly what your costs are, on an annual basis, of course. But it can also come with unpredictable results. On the other hand, the OpEx approach to cloud services and IT overall could give your business the flexibility needed in this ever-changing world and additionally could meet your customers’ needs better and faster.
To sum up, if you believe a capital expenditure is too complicated for your business, then you should opt for cloud services on a pay-as-you-go model. But if you want to have certain control of your cloud infrastructure, you can combine resources from both private and public clouds and create a type of hybrid cloud where your business purchases a public cloud service, but you have your own IT team responsible for it.
Haar Cloud provides both OpEx and CapEx services, so you can have total control of your IT infrastructure cost. So, even if you’re still not sure what’s right for your business, reach out and we’ll help you make the best decision.