CAPEX (Capital Expense) and OPEX (Operational Expense) are the two possible ways purchases can be billed in an organization. Capital expenses are defined as purchases that still offer value after 1 year from purchase. Anything else is considered a non-capital expense, an operational expense.
Traditionally, IT solutions have been purchased as capital expenses because they have been purchased as licenses. The solutions are considered investments because the buyer ‘owns’ them once they make a purchase and because they offer value to the organization well after the initial year of purchase. This might seem like a good thing, gaining an asset, but in the world of IT, it is actually not.
There are myriad reasons for OPEX purchased solutions (subscriptions or pay-as-you-consume service models) being superior to CAPEX solutions (asset investments).
- OPEX purchases are non-taxable. While CAPEX purchases also have tax-write offs and deductions, it is generally agreed that the value is smaller than the savings from not paying any taxes on a purchase whatsoever. Therefore, in absolute terms, a solution purchased at equal value as an OPEX purchase rather than a CAPEX purchase is considerably cheaper.
- CAPEX purchases are not truly 1 time purchases. According to a Cloud Technology Partners article, organization pays around 20% of the initial purchase price as an annual maintenance contract (AMC) to the vendor to keep the solution up to date and for bug fixes and minor upgrades. The total cost of a CAPEX purchase is, therefore, significantly higher, year on year than the raw price of the investment. OPEX purchases, on the other hand, are paid for all-inclusive maintenance charges.
- With a CAPEX purchase, you are saddled with a permanent license. If the solution does not perform, or if the vendor becomes insolvent or ceases to support the product, you need to purchase a new license for a new product to replace the old one’s functionality. This is a massive extra cost. Large sums of money can easily be wasted on a poor purchase.
- One big drawback of CAPEX purchases is that they require your own hardware and capable staff to maintain and run. This is a significant additional overhead cost, and non-IT businesses don’t want to spend on hardware and staff that do not pertain to their core business. Hardware requirements for OPEX purchases, on the other hand, are handled by the service provider. Since the advent of cloud computing, as-a-service delivered IT solutions are hosted and maintained by the vendor at an all-inclusive subscription cost or on a pay-as-you-consume basis, rather than by the buyer. This means big savings and offloading of responsibility, which allows businesses to focus on their core competencies instead. According to a Cloud Technology Partners article, it is estimated that organizations that buy CAPEX billed IT solutions have an 80% lower hardware utilization and efficiency rate due to the hardware that they must invest in along with the solution.
- The cost of subscription OPEX purchases is considerably lower due to small per-user subscription costs. This number is reduced even further if the purchase is made for a ‘pay-as-you-consume’ service because employees on leave or low-use job roles (when a user tends to utilize a solution infrequently) get discounted from the total paid.
- Purchase approvals are far easier for OPEX billed solutions than CAPEX ones. C-level executives and managers that authorize purchases are far more cautious when purchasing expensive capital investments than when purchasing cheap or moderately priced subscriptions to services that can be discontinued at any time. In terms of agility and ‘keeping with the competition’, OPEX billed IT solutions offer the distinct advantage of agility.
Therefore, OPEX purchases in the world of IT solutions are far more desirable than CAPEX purchases, and this trend is already growing when it comes to industry offerings. Lower total costs, more scalability, and, therefore, agility, and much lower hardware overheads are just some of the benefits of OPEX purchases. Getting purchase approvals for purchases is also easier as total costs are considerably lower, and no long-term commitments are required.