Azure Capex Vs Opex

Azure Capex Vs Opex

In cloud computing, there is the concept of capital expenditure and operational expenditure. You’ll often see capital expenditure referred to as CAPEX and operational expenditure referred to as OPEX. Traditionally, companies have had to work with the On-Premise model of computing and this meant housing their own offices and data centers. These are capital expenditures, and often times very massive ones at that. The Capex in this case includes space, equipment, software, and a workforce to run and maintain everything. Of course Azure and other cloud service providers offer an operational expenditure (OPEX) model that may be a better deal. In this article, we’ll look at Capex versus Opex.

How often have you heard, “What’s the bottom line here? What is the total cost of ownership to us?” with regard to business planning? By the same token, it is clear that the integrity of your business’s data and IT infrastructure are critical aspects of the business however management does not simply offer blank checks for IT initiatives. IT expenditures need to work for the business and help it meet important goals. A business must evaluate both Capex and Opex options to determine which benefits the company the most with the highest return on investment (ROI).

On-Premise Capital Expenditure

capex in azure
The capital expenditure model entails spending money upfront on physical infrastructure and then deducting those expenses for tax purposes over a period of time. Most large companies are very savvy with capital expenditures and how to best leverage the tax code to their benefit. This is sometimes a sticking point for companies considering the cloud since they are so skilled with the Capex model. Some of these investment expenses include:

  • Server Costs (Computers)
  • Storage Costs (Hard Drives)
  • Network Costs (Routers, Switches, Cables)
  • Backup and Archive Costs
  • Disaster Recovery Costs
  • Data Center Costs (Rent, Cooling, Physical Security)
  • Technical Worker Computing Responsibilities

In the Capex approach, businesses need to guess upfront what they plan to spend. The business pays for these expenses upfront, expecting to benefit the business for years to come. Any maintenance costs are also considered CapEx since they extend the asset’s lifetime. The value of CapEx depreciates over time and the amortized amount is deducted for a given year in which the asset provided value.

Cloud-Based Operational Expenditure

azure cloud opex model
By using an Opex approach, businesses shift all of the associated costs associated with On-Premise datacenters to the Cloud Service Provider. Once the business completes this task, it only has to be concerned with non-physical costs. Some of these would include:

  • Leasing Software and Customizing Features
  • Training Employees in Cloud Offerings
  • Costs for Cloud Support
  • Billing based cloud metrics
    • compute usage
    • storage usage

The Opex approach allows the business to try cloud products and services without the need to buy physical equipment. This offers flexibility in investment and a huge reduction in costs. A subscription fee for cloud services is considered OpEx and the CSP is making the infrastructure investment while the business only pays for the resources as they are needed. Operational Expenditures are listed on an income statement as either a cash reduction or accounts payable increase. This makes them fully deductible in the year in which the expense is incurred. If the business spends $200k for cloud services in one year, that business can claim a $200k deduction on its tax return.

cloud consumption based model

Assets Can Be Intangible

Assets have become intangible in the modern business world. In other words, an increasing number large businesses have few physical assets and instead build value with ideas and information, intellectual property, and branding. In the past businesses invested in physical locations, equipment, materials, and supplies to function.

Technological change, big data, mobile, and the cloud are displaying the value in intangibles. As innovation moves forward the value of intangibles causing sweeping change that forces companies to reevaluate things like:

  • How products are designed, produced, and delivered
  • Internal Initiatives and Operations
  • IT Spending and Training
  • Relationships With Customers

Benefits of the Cloud

Today it seems like the only thing you hear about are the benefits of the cloud. And why not, the cloud is a great choice for all types of cloud computing applications needed to run your business, empower employees, and serve your customers. It is always worth exploring further to learn more about what the cloud can do for your business.

The cloud provides these common benefits as we have seen:

  • Very flexible to changing requirements
  • Accesible anywhere there is an internet connection
  • Cross border collaboration
  • Almost no lead time for getting applications to market
  • Competitive advantage over non cloud businesses
  • Excellent Data Security
  • Hardware Savings
  • Simple pay as you go deployment model
  • Always current via updates
  • In Azure, you are charged only for what you use. This is known as a Consumption-based model

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