Risks of building and managing IT

Its natural to weigh your costs and options before any major IT purchase is made. If you expect to extract value from the product or service later, you must understand what circumstances will impact that value, including time, wear, and the indomitable march of progress. Savy Chief Financial Officers are changing the way they invest in IT, moving away from the traditional Capital Expenditure (CapEx) model and more towards Operational Expenditures (OpEx).

So, what is the difference between CapEx vs OpEx? 

According to ShorTel, “Traditionally for technology investments, CFOs most often preferred capital expenditures over operating expenses because they could take advantage of amortization and depreciation of those investments over an extended period of time. There’s a growing argument, however, that operating expenses (OpEx) have distinct advantages over capital expenditures (CapEx) that have made it a favored investment approach by finance departments.”

CapEx:

  • “Large amounts of cash required
  • Error-prone guesswork to estimate future capacity needs for static hardware/software
  • Lengthy and arduous processes to estimate budget and get it approved
  • Once the technology is purchased, the company is stuck with it – despite technology advancements or changes in company growth”

OpEx:

  • “Pay only for the capacity it needs at the moment and scale as requirements change
  • Ease and speed up the budgeting process because short-term spending requirements are less
  • Make multiple investments across the business since capital isn’t tied up in large upfront expenditures
  • Fund expenses faster through operations rather than needing to borrow money or divert money from other projects to pay for large, upfront technology costs
  • Smooth out cash flows over time instead of requiring lumpy outlays”

As an example of this type of spending, consider a new car. Only in very rare cases do they ever increase in value, regardless of whether you actually drive it. You can cut its retail value by 15 to 25% the moment you drive your new car off the dealer’s lot. Another example? Consider technology purchases: servers, desktops, networking gear, storage, and more. Unless it’s plugged in and operating at full capacity the moment you order it, its relative value to your company starts decreasing immediately, and will be outdated in less than six months. After a year it’s will have cost more resources through the upkeep and overall maintenance than the piece of equipment is worth; anything beyond another two years and you’ll actually need to pay someone to haul it away to trash and then to repurchase brand new, expensive equipment.

However, when it comes down to it, you need to invest in the right IT resources to operate your business, even if it takes a serious bite out of your profitability and seeks constant attention. Or do you?

For most mid-sized businesses that rely on technology to operate their business and to service their customers, IT expenses can become a burden for the CFO trying to write them off against their operating income. Building and managing IT becomes a major cost center that doesn’t look as good as depreciating assets on the balance sheet. For example, you take 36 months to gain the full tax benefits of a high-performance server blade, but it’s obsolete in 12 to 18 months and needs to be upgraded or replaced. Plus, there’s another 18 months worth of value that you’re not realizing. Not surprisingly, owners and investors are moving away from this model.

Enter: The Subscription Based IT Model

Consider, instead, the OpEx model. Rather than investing in the resources and hardware that must be maintained and upgraded, housed, powered, cooled, and staffed, you could subscribe to a Managed IT services model to access the latest technology and technologists.

Even better is to alleviate such responsibilities entirely and move to a hosted model such as a public cloud offering infrastructure-, platform-, and software-as-a-service. In each of these modes, all underlying physical assets are managed by the provider and you only pay for what you need.

Organizations that rely on innovation can more freely adopt critical upgrades to enhance IT performance, expand their capabilities with new technology, and adhere to new regulations much quicker. Organizations can do this without complex capacity planning and expense forecasting.

What are the challenges with the Build In-House Model?

  • Skilled Labor Costs (Salary, Benefits, Training, Replacement Costs)
  • Capital Outlay (Hardware/ Software/ Management Tools, Facilities)
  • Integration Costs (Consulting)
  • Reoccurring Refresh Cycles (Hardware, Software, People, Facility Infrastructure)

What are the benefits of a Subscription / Shared Services-Based Cost Model?

  • No up front capital 
  • Only pay for what is consumed
  • Scale on demand (skilled labor, capital, software, facilities)
  • Resource Utilization is Maximized
  • Rapid Time to Market
  • Rapid Return on Investment (business value is realized at the same financial period as cost)
  • Predictable Spend

To learn more about saving your business from the never-ending financial costs of refresh cycles check out our additional Learning Resources below (Don’t worry you won’t need to enter your phone number and your favorite color to access our assets) –

About the Author

Synoptek is an established firm that provides information systems consulting and IT management services. Synoptek and its predecessors have been providing these services for 23 years.