CapEx vs OpEx: Making the Most of Your Data Center Investment
By: Alan Seal on March 4, 2020
Any conversation involving IT expenditures isn’t likely to get very far before touching upon the contrast between CapEx budget and OpEx budget. Today’s IT investments are complex and can have long-lasting impacts on an organization, so it’s critical to examine how companies categorize their expenditures as they work to grow their business.
What is CapEx vs OpEx?
Very simply, the difference between CapEx vs OpEx is all about how and when a business is spending its money. This is incredibly important when it comes to IT investments, which are often quite significant and can have long-term impacts on an organization’s financial flexibility. Every technology-related spending decision falls under one of these categories, so understanding their impact is one of the core elements of developing a successful IT strategy.
A capital expenditure (CapEx) is a one-time expenditure that involves the purchase of a tangible asset, usually in the form of property or equipment. Critically, it also applies to the cost of repairing or upgrading that asset over time. From an accounting standpoint, any spending classified as CapEx is not fully deducted from the accounting period when the cost was incurred, but rather spread over several years as the value of the asset depreciates. Some CapEx budget examples would include computing equipment, a data center, or laying cable to provide connectivity access.
An operating expense (OpEx), on the other hand, is any expense incurred in order to keep a business running on a day-to-day basis. Since OpEx spending uses a “pay-as-you-go” approach, there is no long term asset involved. This means that OpEx costs are fully deductible for the tax year they’re made. Some OpEx budget examples include employee salaries, energy costs, and rental/leasing fees.
How the CapEx vs OpEx Model Applies to Data Centers
Information technology presents a complicated challenge for many organizations. Computing equipment is typically classified as CapEx budget because the company must purchase servers and other hardware in addition to the software applications they need to deliver services. But these costs pale in comparison to the massive CapEx outlays associated with building a private data center facility.
Setting aside the costs of acquiring the land and assessing the local infrastructure, building a structure that can meet the requirements of a modern data center can cost more than $200 per square foot. Even a small facility (10,000 sq ft), then, would cost upwards of two million dollars, and that’s not even taking into account the cost of the computing equipment or laying down the cabling needed to provide adequate connectivity.
But the expenses don’t stop there. Managing a private, on-premises data solution incurs a number of additional costs over time. As equipment fails, it will need to be repaired or replaced. This could apply to servers and switches, but also to air conditioning units, power distribution units, and backup power supplies. In order to maintain all of these capital investments, organizations must take on additional operating costs. For a data center, that means hiring people to manage the facility and keep it secure. While this might be viable for a large organization with a substantial IT budget, it will likely be beyond the resources of a smaller company that can’t afford to pull OpEx budget resources away from the IT teams working to develop innovative new services that will help the company grow.
The other big problem is that not every organization can afford to invest in the assets they need in the future. Data centers are a long-term asset that will take decades to depreciate. The problem isn’t so much that it costs too much for a company to build a data center that meets its current needs (although that’s probably true for a start-up or small company), but rather that it can’t afford to build the data center it will need five to ten years from now. Once a private data center is built, there is a hard limit on how much its owner can expect to grow before it needs to invest in a new data solution.
Shifting CapEx to OpEx with Colocation
Given these high costs, many organizations are transitioning away from the steep CapEx of building a private data center solution. Colocation services allow companies to fundamentally shift the nature of their IT expenditures from CapEx to OpEx. Rather than investing in physical infrastructure that will need to be managed and maintained for years to come, colocation customers can instead lease out rack space for their hardware and pay only a small portion of the facility’s power and cooling costs.
This solution also has the advantage of being scalable. When the time comes to expand their network capabilities, colocation customers can simply upgrade their existing plan or connect to scalable cloud solutions rather than face the prospect of having to expand their infrastructure. More importantly, the cost of maintaining the data center facility itself falls to the colocation provider, which allows their customers to dedicate more resources to developing their products and services rather than keeping their data solution in order.
Shifting data center costs from CapEx to OpEx gives companies much greater flexibility, allowing them to adapt rapidly to changing market conditions as they undergo their digital transformation. For smaller organizations and enterprises alike, outsourcing the expense and hassle of managing a state-of-the-art data center makes it much easier to focus on investments that will help to grow their business.
As more organizations transition from on-premises data solutions to colocation environments, decisions involving IT expenditures will become much more complex. Where companies once made a CapEx decision to invest in infrastructure and software, today they have a wide range of vendors and solutions partners to choose from. In addition to colocation providers, they also have the flexibility to adopt multiple software solutions thanks to cloud-based platforms that have effectively turned software into an OpEx.
For organizations looking to fully embrace digital transformation, retaining IT and financial flexibility is essential to their continued growth and change. That’s why shifting from limited CapEx data solutions to more adaptable OpEx arrangements has become such a popular choice for many of today’s most innovative and fast-growing companies.
About Alan Seal
Alan Seal is the VP of Engineering at vXchnge. Alan is responsible for managing teams in IT support and infrastructure, app development, QA, and ERP business systems.