Click here to close now.


Microservices Expo Authors: Elizabeth White, Ian Khan, Jason Bloomberg, AppDynamics Blog, Liz McMillan

Related Topics: @CloudExpo, Microservices Expo, Microsoft Cloud, Containers Expo Blog, Apache, Cloud Security

@CloudExpo: Article

Cloud Benefits: The Opex / Capex Benefit Debate

The bottom line is that CAPEX to OPEX shift should rarely be the deciding factor in a systems selection.

With the cloud space getting crowded each day, cloud service providers list a host of benefits by moving to the ‘Pay as you Go' model.... Among other benefits, reduced capital expenses (fixed Capex costs), and increased operating expenses (variable Opex costs) is listed as a key benefit.

The article attempts to analyze this.

In general, from an accounting perspective, by shifting from a capex to opex based model, the benefits can be many. Some of these could be:

  • Use of Opex allows deducting expense in the current year and reduces tax liability applied on net income.
  • Opex benefits due to time value of money (100 $$ saved today is better than 100 $$ saved next year)
  • No upfront capex expenditure if cost of capital is high and /or capital is not available
  • By civerting  capex to opex, the capital saved can be used elsewhere giving a better yield.

All points taken, if you ask a accountant, he would say that it's just accounting mechanics... He will also list down couple of points that go against this and as one can notice most of the cloud vendors do not mention this.

  • Opex decreases the company's book value as the expense moves to profit & loss statement hitting the bottom line.
  • Opex decreases the company's EBITDA.
  • Cost of On-demand services is always high as they carry a  utility premium. Think of renting a car vs. a buying a car. By renting a service, you are in a way borrowing money from the service provider, and paying the loan back to them in monthly payments.
  • P&L, Balancesheet and cash flow statement looks less attractive. More often than not, the real tangible benefits of moving from capex to opex are governed by other technical / business factors .

Capex to opex movement is just an accounting measure and often tactical. It may well serve some short term financial objectives that the company needs but it is hard to prove that this is indeed true in the long run.

What Is Better: Capex or Opex
Should one really care about the opex and capex debate and what should be the choice? Or this is contextual. Often, the reasons of moving from Capex to Opex could be very different and purely financial. For e.g:

  1. Shortage / Availability of capital
  2. High cost of capital
  3. Overall economic environment which impact investment decisions.
  4. Better use of available capital
  5. Benefits from alternate capex investment outweighs the higher cost of ‘pay as you go service' in the long run.

The objectives could be the other way around also (Reduce Opex and increase Capex), for e.g,:

  • To boost profits (artificially, some may say) to report to investors and increase shareholder value
  • A higher value of assets on its balance sheet
  • Cost of capital is cheap and readily available.
  • No better use of capital What this means is that the movement of capex to opex or vise versa is highly contextual.

It may all sound good due to current economic environment and capital constraints but may  not hold good in all cases and in the long run

The Real Benefits
The real benefit must be seen from both Financial as well as business / technical objectives. Once the business / technical objectives are ascertained, the appropriate financial treatment (capex / opex) need to be done based on the objectives / constraints. For example, the financial needs of a company could be:

  1. Optimizing capital investment due to shortage / Availability of capital
  2. Optimize overall Cost of Capital
  3. Workaround the difficult economic environment which impact investment decisions.
  4. Investment Options at hand
  5. ROI
  6. Better profit reporting to investors and increase shareholder value
  7. Higher value of assets on balance sheet
  8. Better Cash flow management The financial objective may be tactical in many cases and may change over a course of time.

That said, the real reasons behind a ‘pay as you go' model or so called ‘opex' model, may be unrelated to the financial context with very different objectives (Often business driven). These could be:

Better Utilization Rates
Here is where the real benefits of shared services come into play.  If a company is using less than 30% of installed capacity, ‘pay as you go' model can give significant cost benefits. If it is already using more than 70 %, the benefits may not be that high as utility services come at a premium as compared to owned service for obvious reasons..

  • Operational advantages
  • Service level improvements
  • User satisfaction considerations
  • Keeping pace with the technology upgrades

Due to the rapid changes in technology,  it doesn't make sense to sink or locking money into equipment that's surpassed by the very next model. Opex in the form of pay as you go models help in this regard. Costs are reduced and shifted from capital expenses to operating expenses, which save money. The capital saved can be used elsewhere in more productive investments or reduce the cost of capital.

  • Better scalability, metering, automation and virtualization - all for less money than a traditional data center.

Bottom line is that CAPEX to OPEX shift should rarely be the deciding factor in a systems selection.

The choice architecture should be based upon meeting the business and technical requirements.

A company can choose to use a public shared cloud - on rent and hence opex based model OR go for a private cloud  - owned and capex OR an internal cloud (virtualized) that can satisfy all the business / technical requirements for the CIO while also meeting the financial objectives for the CFO.

It all depends on the context. A WIN-WIN situation for all is one that should be looked at.

Brief on Opex and Capex

Capital expenditures are expenses to create assets (or add value to an existing asset) for future benefts with a life that extends beyond the tax year.

  • Cannot be fully deducted in the period when they were incurred. Tangible assets (building) intangible assets ( h Money spent on inventory falls under capex ardware etc) are depreciated and intangible assets (patent etc) are amortized over time.
  • Money spent on inventory falls under capex
  • Show up in Balance Sheet and Cash Flow from Investing head in the Cash flow statement

Refers refers to expenses incurred in the course of ordinary business, such as sales, general and administrative expenses (and excluding COGS, taxes, depreciation and interest

  • Operating expenses are fully deducted in the accounting period during which they were incurred.
  • Show up in Profit and loss statement.
  • End up in Cash Flow from operating activities head in the Cash flow statement

More Stories By Sunil Pathak

Sunil has close to 16 years experience in Information Technology providing leadership, management, planning, system development and engineering, training, people development, methodologies, and process support. He has worked in the area of internet based technology solutions, ecommerce applications, product development, product maintenance, e-business platforms, portals, collaboration, content management, and business intelligence.

He currently works for Colt Technologies Services, Bangalore, India as Head of Systems Development and Support. Sunil holds an Executive MBA (IIM Calcutta), Masters in Technology (IIT Kanpur) and a Bachelor of Engineering in Electrical Engineering. He also holds diploma in entrepreneurship from EDI Ahmedabad. He can be reached at :
Linkedin -
Twitter - @sunil__pathak

Disclaimer:The opinion expressed here are my own and not necessarily those of my employer.

@MicroservicesExpo Stories
The Internet of Things (IoT) is growing rapidly by extending current technologies, products and networks. By 2020, Cisco estimates there will be 50 billion connected devices. Gartner has forecast revenues of over $300 billion, just to IoT suppliers. Now is the time to figure out how you’ll make money – not just create innovative products. With hundreds of new products and companies jumping into the IoT fray every month, there’s no shortage of innovation. Despite this, McKinsey/VisionMobile data...
One of the most important tenets of digital transformation is that it’s customer-driven. In fact, the only reason technology is involved at all is because today’s customers demand technology-based interactions with the companies they do business with. It’s no surprise, therefore, that we at Intellyx agree with Patrick Maes, CTO, ANZ Bank, when he said, “the fundamental element in digital transformation is extreme customer centricity.” So true – but note the insightful twist that Maes adde...
Just over a week ago I received a long and loud sustained applause for a presentation I delivered at this year’s Cloud Expo in Santa Clara. I was extremely pleased with the turnout and had some very good conversations with many of the attendees. Over the next few days I had many more meaningful conversations and was not only happy with the results but also learned a few new things. Here is everything I learned in those three days distilled into three short points.
Using any programming framework to the fullest extent possible first requires an understanding of advanced software architecture concepts. While writing a little client-side JavaScript does not necessarily require as much consideration when designing a scalable software architecture, the evolution of tools like Node.js means that you could be facing large code bases that must be easy to maintain.
As organizations realize the scope of the Internet of Things, gaining key insights from Big Data, through the use of advanced analytics, becomes crucial. However, IoT also creates the need for petabyte scale storage of data from millions of devices. A new type of Storage is required which seamlessly integrates robust data analytics with massive scale. These storage systems will act as “smart systems” provide in-place analytics that speed discovery and enable businesses to quickly derive meaningf...
DevOps is about increasing efficiency, but nothing is more inefficient than building the same application twice. However, this is a routine occurrence with enterprise applications that need both a rich desktop web interface and strong mobile support. With recent technological advances from Isomorphic Software and others, rich desktop and tuned mobile experiences can now be created with a single codebase – without compromising functionality, performance or usability. In his session at DevOps Su...
You may have heard about the pets vs. cattle discussion – a reference to the way application servers are deployed in the cloud native world. If an application server goes down it can simply be dropped from the mix and a new server added in its place. The practice so far has mostly been applied to application deployments. Management software on the other hand is treated in a very special manner. Dedicated resources are set aside to run the management software components and several alerting syst...
In his General Session at DevOps Summit, Asaf Yigal, Co-Founder & VP of Product at, explored the value of Kibana 4 for log analysis and provided a hands-on tutorial on how to set up Kibana 4 and get the most out of Apache log files. He examined three use cases: IT operations, business intelligence, and security and compliance. Asaf Yigal is co-founder and VP of Product at log analytics software company In the past, he was co-founder of social-trading platform Currensee, which...
It's been a busy time for tech's ongoing infatuation with containers. Amazon just announced EC2 Container Registry to simply container management. The new Azure container service taps into Microsoft's partnership with Docker and Mesosphere. You know when there's a standard for containers on the table there's money on the table, too. Everyone is talking containers because they reduce a ton of development-related challenges and make it much easier to move across production and testing environm...
People want to get going with DevOps or Continuous Delivery, but need a place to start. Others are already on their way, but need some validation of their choices. A few months ago, I published the first volume of DevOps and Continuous Delivery reference architectures which has now been viewed over 50,000 times on SlideShare (it's free to registration required). Three things helped people in the deck: (1) the reference architectures, (2) links to the sources for each architectur...
Continuous processes around the development and deployment of applications are both impacted by -- and a benefit to -- the Internet of Things trend. To help better understand the relationship between DevOps and a plethora of new end-devices and data please welcome Gary Gruver, consultant, author and a former IT executive who has led many large-scale IT transformation projects, and John Jeremiah, Technology Evangelist at Hewlett Packard Enterprise (HPE), on Twitter at @j_jeremiah. The discussion...
Hiring the wrong candidate can cost a company hundreds of thousands of dollars, and result in lost profit and productivity during the search for a replacement. In fact, the Harvard Business Review has found that as much as 80 percent of turnover is caused by bad hiring decisions. But when your organization has implemented DevOps, the job is about more than just technical chops. It’s also about core behaviors: how they work with others, how they make decisions, and how those decisions translate t...
In today's enterprise, digital transformation represents organizational change even more so than technology change, as customer preferences and behavior drive end-to-end transformation across lines of business as well as IT. To capitalize on the ubiquitous disruption driving this transformation, companies must be able to innovate at an increasingly rapid pace. Traditional approaches for driving innovation are now woefully inadequate for keeping up with the breadth of disruption and change facin...
The Internet of Things is clearly many things: data collection and analytics, wearables, Smart Grids and Smart Cities, the Industrial Internet, and more. Cool platforms like Arduino, Raspberry Pi, Intel's Galileo and Edison, and a diverse world of sensors are making the IoT a great toy box for developers in all these areas. In this Power Panel at @ThingsExpo, moderated by Conference Chair Roger Strukhoff, panelists discussed what things are the most important, which will have the most profound...
PubNub has announced the release of BLOCKS, a set of customizable microservices that give developers a simple way to add code and deploy features for realtime apps.PubNub BLOCKS executes business logic directly on the data streaming through PubNub’s network without splitting it off to an intermediary server controlled by the customer. This revolutionary approach streamlines app development, reduces endpoint-to-endpoint latency, and allows apps to better leverage the enormous scalability of PubNu...
I recently attended and was a speaker at the 4th International Internet of @ThingsExpo at the Santa Clara Convention Center. I also had the opportunity to attend this event last year and I wrote a blog from that show talking about how the “Enterprise Impact of IoT” was a key theme of last year’s show. I was curious to see if the same theme would still resonate 365 days later and what, if any, changes I would see in the content presented.
Microservices are a very exciting architectural approach that many organizations are looking to as a way to accelerate innovation. Microservices promise to allow teams to move away from monolithic "ball of mud" systems, but the reality is that, in the vast majority of organizations, different projects and technologies will continue to be developed at different speeds. How to handle the dependencies between these disparate systems with different iteration cycles? Consider the "canoncial problem"...
Culture is the most important ingredient of DevOps. The challenge for most organizations is defining and communicating a vision of beneficial DevOps culture for their organizations, and then facilitating the changes needed to achieve that. Often this comes down to an ability to provide true leadership. As a CIO, are your direct reports IT managers or are they IT leaders? The hard truth is that many IT managers have risen through the ranks based on their technical skills, not their leadership ab...
Discussions of cloud computing have evolved in recent years from a focus on specific types of cloud, to a world of hybrid cloud, and to a world dominated by the APIs that make today's multi-cloud environments and hybrid clouds possible. In this Power Panel at 17th Cloud Expo, moderated by Conference Chair Roger Strukhoff, panelists addressed the importance of customers being able to use the specific technologies they need, through environments and ecosystems that expose their APIs to make true ...
There are over 120 breakout sessions in all, with Keynotes, General Sessions, and Power Panels adding to three days of incredibly rich presentations and content. Join @ThingsExpo conference chair Roger Strukhoff (@IoT2040), June 7-9, 2016 in New York City, for three days of intense 'Internet of Things' discussion and focus, including Big Data's indespensable role in IoT, Smart Grids and Industrial Internet of Things, Wearables and Consumer IoT, as well as (new) IoT's use in Vertical Markets.