The CEO calls the CIO into his office and says “We needed to cut the capital budget this year. As we reviewed the capital expenditures, we discovered that your group spends 80% of the capital budget. We are going to cut your capital expenditures by 50% this year. And by the way I still expect have the implementation of our new CRM system and increase our productivity through the use of technology.” CIO leaves the meeting feeling as if he has be pushed into a small corner with less budget and high expectations of delivery. However, the CIO remembers that even though the capital budget has been reduced, the operating budget has be increased by 3%. Cloud comes to mind for the CIO.
Capital Expense(CAPEX) is the money spent to buy, improve or maintain a physical asset such as equipment, real estate or infrastructure. There could be tax benefits(i.e. depreciation) to organizations by having capital expenses. Operational Expense(OPEX) is an ongoing cost for managing a product, business or system.
It is not uncommon in tough economic times for companies to search for ways to save money as well as improve efficiency. Technology has matured in a way that solutions can be implemented as services similar to the way we purchase services from utility companies.
When organizations move towards a cloud implementation, often the cloud is an operating expense. There are some exceptions where the cloud provider will host physical assets owned and licensed by the cloud consumer, in this case the cloud consumer can classify the physical assets as capital expenses. A cloud provider will remotely host the IT resources for the cloud consumer to allow the cloud consumer to take advantage of benefits of capital expenses like depreciation and tax incentives. Organizations must review their budget and accounting structure of capital expense and operating expenses when considering the cloud. Cloud computing could be beneficial to organizations that do not have the funds to purchase the physical asset up-front. By moving to a cloud solution the organization only needs the funds to cover the operating expenses. Are you ready to make these decisions?