CapEx vs. OpEx: In-Depth Cloud Computing Financial Analysis
CapEx vs. OpEx
At Faction, we hear from organizations of all shapes and sizes that are evaluating when and how they should leverage the Cloud vs. on-premise infrastructure. There are countless things to consider within these evaluations, such as:
- which workloads are or aren’t Cloud capable
- whose job will be affected by the changes
- which Cloud provider you should use: public Cloud vs private Cloud, is a SaaS model better than an IaaS model, etc.
Inevitably, many of these decisions come down to the financial total cost of ownership (TCO) of Cloud vs. on-prem. Traditionally, the Cloud vs. on-premise financial analysis has been centered around the theory of CapEx vs. OpEx.
A common misunderstanding we often hear is that on-premise infrastructure is a CapEx investment.
In reality, buying on-premise infrastructure is both a CapEx and OpEx investment, while the Cloud is typically only an OpEx investment. In fact, we often hear things like, “I can buy my servers for $100k, why would I pay you $8k/mo? I would break even and be losing money in about a year.” Typically, this is not an accurate assessment, so let’s break it down.
In one, flat monthly Faction Cloud subscription, all of the following costs are replaced:
- Hardware Acquisition (CapEx)
- Hardware Support (CapEx)
- Colocation (OpEx)
- Power and Cooling (OpEx)
- Remote Hands (Mix)
- VMware Licensing (CapEx)
- Windows Server Licensing (CapEx)
- Engineer Travel Costs (OpEx)
- Networking Infrastructure (CapEx)
- Bandwidth (OpEx)
- Professional and Managed Services (Mix)
- 4th Year Support Renewal (CapEx)
- Labor (OpEx)
As you can see, on-premise CapEx still requires ongoing OpEx, much like the Cloud. There are a lot more CapEx investments involved in a hardware refresh beyond simply buying the servers. Furthermore, supporting an on-premise environment requires many recurring OpEx investments that are too often not taken into account when performing a TCO analysis. Everything listed above, including the VMware and Windows licensing, is included in a Faction Cloud monthly subscription fee, therefore all the expenses need to be taken into account and comparing apples to apples is needed to complete a truly comprehensive TCO analysis.
On-Premises or Cloud Considerations
There are many things to consider when deciding whether to run IT onpremises or in the cloud, and the cost is often high on the priority list.
However, “cost” is often boiled down to a simple cash on cash analysis, meaning calculating the total costs of hardware on-premises (CAPEX) and compare that directly to the expenses of a cloud contract over a standard refresh cycle (OPEX).
The analysis often omits the soft costs such as management, maintenance, and administration of a data center. More importantly, it overlooks the opportunity cost of investing in data center equipment vs. creating advantages for your business.
As organizations drive to remain agile, adaptable to change and have the resources on hand to react to market demands – focus and specialization have become increasingly more important. Businesses that are bogged down by legacy process and infrastructure can quickly fall behind the competition, particularly if financial resources are tied up in non-core competency projects and investments.
Software companies, as an example, were quick to realize this opportunity cost and have overwhelmingly embraced a cloud-first approach. Having evaluated the opportunity cost of purchasing a new piece of hardware for a data center or reinvesting those dollars back into the development group to add a feature that will allow them to take market share from a competitor, or reinvesting those dollars into the marketing engine for increasing sales and returning 20% on that investment. These factors have driven most Software Companies to push internal operations, testing and development, and delivery
of Software-as-a-Service products to cloud platforms.
Role of the CFO
According to Gartner, CFO’s play a vital role in determining IT investment in 75% of companies today. As finance teams are playing a bigger role in IT, businesses now look at CAPEX as a true opportunity cost, where they can either invest in technology assets or in their core competency to drive top-line revenue and long-term growth.
Operationalizing IT costs allows organizations to move from high cash burn in upfront asset purchases to smoother and more predictable spending. This process allows for easier cost projections, and the ability to deploy upfront cash on other core competency projects or internal reinvestment, rather than depreciating non-core equipment.
If running a data center is not an organization’s core competency, it still has to make financial sense to migrate to the cloud. CFO’s rely on investment analysis to help weigh the investment performance and then compare that against goals and initiatives.
Investment analysis is a critical step in defining the opportunity cost of running traditional on-premises data centers or operationalizing IT through cloud services, and realizing the potential return on investment.
Outlining ROI Analysis
How to tackle an infrastructure ROI analysis. We will walkthrough the process using the
assistance of an ROI analysis tool.
The conventional ROI process includes:
• Analyzing fixed investment costs such as hardware
• Monthly recurring costs like internet bandwidth
• Annual/Monthly recurring costs like hardware and software maintenance contracts
• Discounting the net present value based on the cost of capital
Did you know there are a few costs that are frequently overlooked? Some of the most common overlook costs, include:
• Power consumption
• Colocation or On-Premises Hosting expenses
• Software licensing expenses such as VMware, backup software, and
• IT staff time and additional headcount required to scale
These ancillary costs can be easily overlooked during calculations, and these are important to consider to determine a true ROI. These costs do bare a significant impact on the analysis and future investment success for both CAPEX and OPEX as they lead to unplanned expenses or faulty analysis. ROI preparation can be completed in six steps/
1) Identify future asset purchase prices
– CAPEX purchases: servers, storage, networking, software licenses, etc.
2) Identify future asset maintenance fees
– Maintenance & warranty fees for asset purchases
– Often the first 1-3 years are included in the initial purchase
– Determining costs following initial contract is critical to the accuracy of the model as costs often increase after initial term
3) Identify additional recurring expenses
– Recurring expenses are typically bandwidth, colocation, software rental payments, etc.
4) Account for personnel costs
– Costs for employees & consultants
5) Retrieve your Weighted Average Cost of Capital (WACC) from your finance team
– Discount rate in financial analysis
6) Collect quotes from Cloud Service Providers
– Total monthly recurring fees including all normal & variable costs
– Include setup fees or non-recurring costs