Beyond Capex and Opex

How do we finance IT? We identify a need, we test the waters with a PoC (proof of concept), then we get the green light after we prove the value. We know roughly how much it will cost by looking at the proposal; now let’s go ask for money. Simple, right? Not so. At the next IT conference you attend, ask anyone you strike up a conversation with how they capitalise their IT projects, I’m willing to bet you will either get a momentary silence followed by passionate debate, or a sigh accompanied by angelic-like shaking of the head.

Let’s ad even more confusion

Capex is funding for assets. Simple, no debate required here. Opex is operational expenditure throughout the given period of time – a quarter or a year depending on how a company defines it. These are fairly simple definitions attributed to IT expenses, whether in project or operational mode. However, as time has passed, the introduction of digital process technologies has blurred the lines of conventional IT financing, and applying these conventional funding methods to technologies such as IaaS, SaaS, edge computing etc.

So how is cloud computing financed?

The mainstay of cloud computing is its effort to guarantee Quality of Service (QoS), and a sometimes smoke and mirrors financial benefit, I mean, you’re renting vs buying expensive infrastructure, the Achilles heel of all capital IT projects.

However, there are literally hundreds of white papers on cloud pricing, which is no surprise. Confusion around costing schemes that exist today includes offline, online and edge pricing, together with usage-based, location-based, time-based and volume driven options. I urge readers to study a paper titled ‘Pricing Schemes in Cloud Computing: An Overview’, published in the International Journal of Advanced Computer Science and Applications (IJACSA), Vol. 7, No. 2, 2016. The lengths to which these brave people went to produce this fascinating document speaks volumes of their character, but also to the sheer magnitude of pricing options designed to meet the needs of companies adamant that cloud computing is a must have component of their IT strategy.

We have defined the types of pricing methods available, but have yet to address the issue of Capex vs Opex.

Up to now, Opex has been the preferred choice when paying for cloud services, be it to a cloud provider or the purchase of on premise virtual environments. The idea is that you get rid of the Capex – that becomes the cloud providers’ problem – and your interest is in the Opex. This has not changed and will most likely stay that way in the foreseeable future.

However, disruptive technologies blur the lines of what to cost, RAM or storage, utilisation or quantity, or both? This is the coming question once the in-memory computing that can act as storage, as fast RAM, becomes more popular in high-speed data-driven IT solutions in your plant. The need for more data, faster analysis and faster access to that information is increasing every year. With digitalisation and Industry 4.0 upon us, this technology is ripe for the picking – but how will we capitalise it?

A recent announcement by the Financial Accounting Standards Board approved a ‘guidance’ to allow a company that has a service contract with a cloud provider to capitalise that month-to-month expenditure, or asset, whichever you choose. Of course the argument will have to be convincing when you do apply for the Capex at your internal financial department, as they will probably be as baffled by this ‘guidance’ as you might be. It means one can now, based on certain principles, capitalise a period-based cloud service contract. Hmmm, licence fees, rented software applications, utilisation, yes, all can be capitalised under this guidance.

You can find this guidance by doing a Google search for 350-40 Internal Use Software, but remember, the emphasis here is on ‘guidance’. Just to complicate matters, we have to deal with the emerging edge computing requirement, where the computation and storage is brought closer to the plant, but you have the choice to rent it as well, which completely tips the location-based pricing models on their heads, not to mention the inputs making up these costs such as data centre, cooling, electricity etc., which forms part of a typical cloud pricing structure model.

The bottom line is that we are faced with a future of evolving technologies termed disruptors, but exacerbating this evolution are the plethora of pricing models that accompany these advancements. To keep our bearings, we need to start thinking beyond Capex and Opex and start to quantify our role as leaders through the value of total cost of ownership of the IT platforms we recommend, including the agility of our systems to adapt to change as digital evolution progresses.