Around the globe, CxOs like you are recognizing the importance of investing in intelligent automation to improve productivity and optimize operations. But, deciding to embark on a digital transformation journey is only the first step for your organization. What comes next?
Before you can dive into enterprise-wide digitization, you must define your software procurement strategy as one of two approaches, capital expenditure (Capex) or operational expenditure (Opex).
What’s the Difference?
Capex refers to expenditures that generate benefits in the future. These expenses can include substantial assets such as land, machinery, and IT systems. For example, purchasing a new building may not grow your profit margins right now, but the investment will return significant value to your business over time.
Opex is comprised of the expenses a business incurs in its day-to-day operations. Its effects can be measured within a short timeframe, and include wages, utilities, rent, and maintenance of buildings.
Capex generates potential value in the future, based on costs incurred by a business on its working capital, whereas the Opex model incurs costs on current operational terms with no scope for future value addition.
Capex vs. Opex – The Right Fit for You
Based on your organization’s unique goals, you must decide between making a large, one-time capital investment or committing to a recurring expense. In order to select the appropriate IT procurement model for your business needs, consider the following questions:
- What is your IT department’s policy regarding Capex and Opex?
- Which approach is more likely to be approved, based on your company’s culture?
- What can your organization afford at the moment?
Once you have answered these questions, you must analyze the pros and cons of Capex and Opex, as you move toward making a decision.
Pros and Cons of Capex:
- Increased autonomy and control, especially since ownership of equipment, like servers, allows for greater IT agility
- If the total cost of ownership (TCO) is worked out for more than 5 years, then Capex is a clear favorite since Capex purchases are amortized which further reduces the cost
- Higher value of assets on the balance sheet
- Higher net income to report to investors
Despite the advantages, capital expenses require approval from several layers of management, resulting in a lengthier procurement process. Additionally, all costs must be paid upfront, along with the purchase of several supporting capabilities, such as a power supply, insurance, and maintenance.
Pros and Cons of Opex:
- Can be leased or purchased from a hosting company and paid on a monthly or quarterly basis
- Purchases can be claimed in the current tax year, which allows for more cash in hand
- Low monthly costs can allow for easier budget approval
- Backups, operating system upgrades, and maintenance can be performed by the provider every month (per the contract)
Opex has its own limitations, including fluctuating monthly payments and dependence on a third party to facilitate and monitor your IT performance and deliverables.
The Choice is Yours
Deciding between a Capex or Opex procurement model requires careful consideration of the benefits and challenges related to both options, especially in relation to your vision. Both avenues can enable you to automate processes, achieve your goals, and transform your business—there is no right choice, only the best fit for your organization.