How to Break Down the OpEx vs. CapEx Cloud Computing Debate

Cloud computing is too often reductively branded as an economic calculus that would trade a CapEx model for an OpEx model. But it's a little more complicated than that. Bernard Golden explains what we talk about when we talk about cloud computing.

By Bernard Golden
Fri, February 17, 2012

CIO — The debate about the economic benefits of cloud computing is intense, and is commonly boiled down to a talking point labelled OpEx vs. CapEx. Very often, like many talking points, the headline conflict is really a stalking horse that conceals the true source of conflict.

In the case of OpEx vs. CapEx, what often underlies the discussion is really an indirect, coded debate about the future of IT infrastructure and operations groups: Will they be operators of assets owned by the larger organization, or will they be operators of assets owned by an external provider?

It doesn't take a genius to understand why being responsible for operating hundreds of millions of dollars of owned assets, along with all of the people associated with ownership (technical evaluation, vendor relationships, capacity planning, etc.), is typically seen as more prestigious and important than managing assets from an external provider who takes responsibility for all of those areas. An even more nightmarish vision is that infrastructure and operations groups will be cut out of the equation entirely, with application groups taking responsibility for dealing with external providers, leaving I&O with a dwindling responsibility set, managing an ever-eroding installed asset base.

Consequently, it makes sense that there is plenty of emotional energy around the issue of the cost of cloud computing, with the OpEx vs. CapEx topic commonly designated as the battleground. However, much of the discussion on these topics fails to comprehend the profound implications of different funding models, and how they map against the future of IT applications.

And let me say, up front, that in my view, all of this discussion is really about identifying the best possible method of running applications, because applications are where all the value of IT is created.

Here are some thoughts about nuances (and implications) of funding models that the current debate of OpEx vs. CapEx fails to capture:

All Things Being Equal, OpEx Should Be More Expensive Than CapEx

One of the benefits of the OpEx model is that there is no long-term commitment. When a user is finished with the resource, it is turned back to the provider, who holds utilization responsibility -- that is, the provider has to figure out how to obtain sufficient usage of the resource to make it economically workable.

The lack of commitment is financially valuable, in that it frees the user from having to make a significant, long-term investment. In the financial markets, options have value and are assigned a price. It makes sense that, per unit of measurement, OpEx resources would be more expensive than CapEx resources. One only has to look at rental car pricing to recognize that we pay a premium for short-term commitment. We save money by paying that higher rate for a shorter period of time, which ultimately is less expensive than purchasing a car only to use it for a short while.

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