Capex vs. Opex in Cloud computing

A little while ago we explored how to talk to your upper management about cloud adoption. Check out our thinking again!

When you’re making the case for cloud to your CEO or CFO, should your argument hinge simply on the CAPEX vs. OPEX argument, or is there a more subtle,  effective approach to getting organizational buy-in for the cloud?

Cloud: CAPEX vs. OPEX

The beauty of moving to the cloud is that you actually are lowering both Opex vs Capex at the end of the day, not simply replacing CAPEX with OPEX. This is because in the in-house model, you have CAPEX because you must buy the equipment (servers, etc.). Then you have OPEX for your 24/7network monitoring and management. Some companies may like CAPEX because their business might be EBITDA based, and CAPEX doesn’t fundamentally affect that for those businesses.

You also have OPEX for your System Administrators, for your colocation vendor, bandwidth vendor, hardware vendors, your on-call vendors and legal on top of all of this to negotiate agreements with all these different vendors.

That’s already an incredible amount of operational costs and upkeep. You might also have Linux, Windows, and Virtualization system administrators to support the various OS platforms your cloud or clouds operate on. Outside of this, you will have to consider the hardware management life cycle and the related costs of upgrades and reinvestment every three to five years.

If you add all this up at a company that has some level of scale, you are looking at at least two full time Sr. System Administrators  and two datacenter engineers to monitor the systems at night. You also have OPEX related to HR. You have to recruit, pay recruiter fees, maintain your staff, do performance reviews, affect raises where appropriate, and consider vacation days. You will also have developers outside of your engineering staff. They are necessary to help make your application more robust, with a greater tool set, more features and smoother operating.

OPEX is really the hidden cost saver in cloud as you don’t have to hire 24/7 engineers, Sr. Systems and Network Administrators (in the case of managed cloud), or incur HR and legal fees associated with hiring people full-time. Likewise, the savings in time for existing staff can help them refocus on growth or in the case where developers are distracted by infrastructure, they can refocus on their applications (regaining their opportunity cost OPEX).

You are also now managing one vendor, so all engineers, technical support staff and hardware, software, bandwidth and potential colo vendors are no longer on your headaches. You still have to manage legal in terms of making an agreement with the cloud services vendor, but it is only one agreement, rather than the many separate MSAs.

So when speaking to your company’s c-level executives, even if your company’s valuation is EBITDA based, focus your conversation on total OPEX cost of ownership with Cloud vs. in-house, and you might just find that find that cloud is an EBTIDA enhancer via FTE savings over time, and the cash savings thanks to no longer having CAPEX is the icing on the cake (vs. the main benefit).

It also comes down to utilization and focus. If you’re growing at a fast pace, you don’t want your internal people taking time away from the mission-centric work to manage upkeep of systems. If you’re steady state (a mature business for example) and your people in their allotted roles are at full utilization, then moving to cloud might be an unnecessary expense.


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