OpEx versus CapEx: the issues

Writing in CIO magazine, Bernard Golden outlines some of the concepts that need to be understood when performing an OpEx versus CapEx calculation for IT infrastructure. For example, no-commitment OpEx (such as the classic Amazon AWS pricing model) should always cost more per service hour given that there is a cost to a no-commitment relationship1 that must be borne by the service provider. He uses the car-rental business as an example—which may not be the best analogy, but it makes the point.

Another question is that of utilization. Forrester analyst James Staten coined the term “Down and Off“, an idea somewhat analagous to switching off the lights in an empty room. Prior to the cloud, the argument goes, “Down and Off” is a) too hard to do, and b) there is little economic imperative to overcome the challenges to implementing it as the cost of computing is wrapped up in CapEx that has already been accounted for.

The difficulty in making use of Down and Off is what economists call “friction”, and one of the benefits of a highly automated cloud computing model is the elimination of barriers to reducing unwanted operational overhead.

As such costs change in response to technical innovation, Golden points out that

… input assumptions to financial analyses will change as IT organizations begin to re-evaluate application resource consumption models. Many application designs will move toward a continuous operation of a certain base level of resource, with additional resources added and subtracted in response to changing usage. The end result will be that the tipping point calculation is likely to shift toward an asset operation model rather than an asset ownership one.

1. Both Amazon and IBM, amongst others, offer reduced hourly rates for customers that sign-up for a fixed-length commitment period.