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CapEx vs OpEx: What is the Most Effective Cloud Cost Management Strategy?

Cloud | Posted on April 29, 2019

Jumping into a cloud migration without the right planning is like signing a contract without reading the fine print. What initially seemed straightforward can quickly become much more complicated and expensive than expected.

Enterprises that foresaw big cost savings and other ROI from their cloud spend often find themselves wrangling with multiple technical and financial issues, especially as they confront the complexity of today’s multi-cloud environments.

Over 80 percent of enterprises rely on multiple cloud computing services, for everything from CRM software to business collaboration tools. Ensuring a sustainable multi-cloud setup requires adept planning in tandem with cloud cost management. Proper planning will avoid costly surprises by providing clear insights into usage levels and their associated expenses from the start.

More specifically, it’s essential to perform a thorough cost-benefit analysis when deciding what to keep in your on-premises environment (CapEx) and what to replace with workloads in the public cloud (OpEx).

CapEx vs OpEx and the overall economics of cloud investments

CapEx is the standard model of traditional IT procurement, while OpEx is how cloud computing services are procured. The two have very different implications for cost, control and operational flexibility.

The public cloud in particular is closely associated with cost savings because it doesn’t require any steep upfront CapEx. But it’s not always the most economical option. Fixed investments in IT equipment (e.g., for a private cloud) can actually be less expensive in certain cases. Before making the leap to the cloud, it’s advisable to have:

  1. A rationale other than just cost reduction, since it can vary considerably or not materialize at all depending on the implementation.
  2. A plan for governing the highly variable OpEx costs that carry risks that don’t exist in CapEx environments.

One of the prime reasons for cloud migration is the overall operational flexibility, beyond just potential savings, unlocked by the OpEx model.

Let’s look at how CapEx and OpEx compare as cost management strategies:

CapEx – Capital Expenses

Under CapEx procurement, you make a significant upfront investment in order to acquire and maintain your critical IT assets. This comes with sunk costs that make it difficult to pivot as business requirements evolve and which can impede or kill other projects in need of funds.

Many organizations also overbuy, in order to handle peak demands, but often times this results in expensive excess capacity that lays dormant.

However, if a CapEx asset’s useful life extends beyond a year, it can typically be paid for through depreciation. This allows for tax deductions as the purchase accumulates wear and tear. You also have full control of your resources without having to rely heavily on an outside provider.

CapEx comes with many constraints, including, but not limited to:

  • The physical space required for these assets,
  • Their steady depreciation,
  • The required – and often complex – technical setup, and
  • Lengthy acquisition cycles.

These limitations are what make cloud an appealing upgrade option in the first place. However, physical servers still have an important place for many organizations as they are being used to build their Hybrid IT and Multi-cloud strategies.

Examples of CapEx Projects:

  • Building a server farm to host business applications
  • Creating a Storage Area Network to host data across applications
  • Investing in new network equipment to improve performance

Capital expenses (CapEx) vs Operating expenses (OpEx) with cloud investment

OpEx – Operating Expenses

With OpEx, and technologies like public cloud, you gain much more flexibility than you would with CapEx:

  • Its pay-as-you-go structure allows for predictable expenses, with capacity being scalable to current demand and allowing for future growth.
  • Costs are based on consumption, meaning less risk of over provisioning. However, it’s important to use a solution that’s properly sized to actual demand and supported by automation, to avoid runaway spending.
  • Projects are easier to pivot thanks to the availability of on-demand resources and the option to use bursting and elasticity to scale capacity up and down as your needs change.
  • Line-of-business units can also take ownership of budgets that were once the exclusive purview of the IT department.

At the same time, you lose some control over your IT infrastructure and often have to make do with limited provider tools. This makes it difficult to monitor cloud performance in the context of your business requirements.

OpEx can even become more costly than simply purchasing an equivalent CapEx asset, especially if there is no accountability for users or optimizations within the cloud services budget.

Left unchecked, the self-service at the heart of cloud frequently results in the familiar problem of overspending. This typically arises when departments and individual users provision, decommission and manage cloud instances without any consistent or governance framework.

Keeping costs from spiraling out of control is essential when consuming OpEx services.

The answer to “Should I use a CapEx or OpEx model for my infrastructure?” will always depend on the situation at hand. That said, as public cloud continues to gain popularity, so will OpEx.

It’s much easier to make pivotal decisions about your cloud environments and get the most from an OpEx deployment if you have a well-defined process for predicting your costs, along with the technical solutions for managing them.

Examples of OpEx expenditures include:

  • Public cloud consumption
  • Telecom service fees
  • Offsite backup/archival storage

Get your Cloud spend under control - Softchoice Cloud Managed Services

Planning ahead for a more manageable cloud migration

In addition to looking beyond cost savings to justify your cloud investments, it’s important to go through all your data center configurations to see where they diverge from your actual usage. This ensures you are not over-provisioning your cloud environment from the get-go .

This gap assessment, which Softchoice can assist with, will help you optimize your cloud spend through the termination of unneeded resources and the addition of bursting and elasticity to cover peaks in demand without over provisioning.

It will also deliver insights into granular expenses for IT staff, facilities and utilities, which provides a clear baseline against which to measure your cloud deployment and forecast your expenses.

After completing your assessment and determining your readiness for a cloud migration, it’s useful to have one place where you can keep tabs on your different cloud services.

The Softchoice Cloud Dashboard provides this consolidated view of accounting, management and optimization across cloud environments. This gives you actionable insights into how your OpEx and CapEx investments are affecting your cloud cost management strategy. It also lets you connect the cost of cloud services to their business value.

Over time, your cloud environment will evolve and require regular reassessment to ensure that waste is eliminated, appropriate governance measures are implemented and resources are generally being used efficiently.

An outside perspective can be helpful along the way. Get in touch with our team to learn more about finding the right tools, managed services and guidance for your cloud investments.


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