Click here to close now.




















Welcome!

Microservices Expo Authors: Pat Romanski, Elizabeth White, Mike Kavis, Ian Khan, Lori MacVittie

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

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


Opex
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 - http://in.linkedin.com/pub/sunil-pathak/4/501/a9b
Twitter - @sunil__pathak


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

@MicroservicesExpo Stories
SYS-CON Events announced today that the "Second Containers & Microservices Expo" will take place November 3-5, 2015, at the Santa Clara Convention Center in Santa Clara, CA. Containers and microservices have become topics of intense interest throughout the cloud developer and enterprise IT communities.
The Software Defined Data Center (SDDC), which enables organizations to seamlessly run in a hybrid cloud model (public + private cloud), is here to stay. IDC estimates that the software-defined networking market will be valued at $3.7 billion by 2016. Security is a key component and benefit of the SDDC, and offers an opportunity to build security 'from the ground up' and weave it into the environment from day one. In his session at 16th Cloud Expo, Reuven Harrison, CTO and Co-Founder of Tufin,...
Container technology is sending shock waves through the world of cloud computing. Heralded as the 'next big thing,' containers provide software owners a consistent way to package their software and dependencies while infrastructure operators benefit from a standard way to deploy and run them. Containers present new challenges for tracking usage due to their dynamic nature. They can also be deployed to bare metal, virtual machines and various cloud platforms. How do software owners track the usag...
Our guest on the podcast this week is JP Morgenthal, Global Solutions Executive at CSC. We discuss the architecture of microservices and how to overcome the challenge of making different tools work together. We learn about the importance of hiring engineers who can compose services into an integrated system.
Alibaba, the world’s largest ecommerce provider, has pumped over a $1 billion into its subsidiary, Aliya, a cloud services provider. This is perhaps one of the biggest moments in the global Cloud Wars that signals the entry of China into the main arena. Here is why this matters. The cloud industry worldwide is being propelled into fast growth by tremendous demand for cloud computing services. Cloud, which is highly scalable and offers low investment and high computational capabilities to end us...
You often hear the two titles of "DevOps" and "Immutable Infrastructure" used independently. In his session at DevOps Summit, John Willis, Technical Evangelist for Docker, covered the union between the two topics and why this is important. He provided an overview of Immutable Infrastructure then showed how an Immutable Continuous Delivery pipeline can be applied as a best practice for "DevOps." He ended the session with some interesting case study examples.
One of the ways to increase scalability of services – and applications – is to go “stateless.” The reasons for this are many, but in general by eliminating the mapping between a single client and a single app or service instance you eliminate the need for resources to manage state in the app (overhead) and improve the distributability (I can make up words if I want) of requests across a pool of instances. The latter occurs because sessions don’t need to hang out and consume resources that could ...
Microservices has the potential of significantly impacting the way in which developers create applications. It's possible to create applications using microservices faster and more efficiently than other technologies that are currently available. The problem is that many people are suspicious of microservices because of all the technology claims to do. In addition, anytime you start moving things around in an organization, it means changing the status quo and people dislike change. Even so, micr...
"We've just seen a huge influx of new partners coming into our ecosystem, and partners building unique offerings on top of our API set," explained Seth Bostock, Chief Executive Officer at IndependenceIT, in this SYS-CON.tv interview at 16th Cloud Expo, held June 9-11, 2015, at the Javits Center in New York City.
SYS-CON Events announced today that HPM Networks will exhibit at the 17th International Cloud Expo®, which will take place on November 3–5, 2015, at the Santa Clara Convention Center in Santa Clara, CA. For 20 years, HPM Networks has been integrating technology solutions that solve complex business challenges. HPM Networks has designed solutions for both SMB and enterprise customers throughout the San Francisco Bay Area.
Digital Transformation is the ultimate goal of cloud computing and related initiatives. The phrase is certainly not a precise one, and as subject to hand-waving and distortion as any high-falutin' terminology in the world of information technology. Yet it is an excellent choice of words to describe what enterprise IT—and by extension, organizations in general—should be working to achieve. Digital Transformation means: handling all the data types being found and created in the organizat...
JavaScript is primarily a client-based dynamic scripting language most commonly used within web browsers as client-side scripts to interact with the user, browser, and communicate asynchronously to servers. If you have been part of any web-based development, odds are you have worked with JavaScript in one form or another. In this article, I'll focus on the aspects of JavaScript that are relevant within the Node.js environment.
Approved this February by the Internet Engineering Task Force (IETF), HTTP/2 is the first major update to HTTP since 1999, when HTTP/1.1 was standardized. Designed with performance in mind, one of the biggest goals of HTTP/2 implementation is to decrease latency while maintaining a high-level compatibility with HTTP/1.1. Though not all testing activities will be impacted by the new protocol, it's important for testers to be aware of any changes moving forward.
This week, I joined SOASTA as Senior Vice President of Performance Analytics. Given my background in cloud computing and distributed systems operations — you may have read my blogs on CNET or GigaOm — this may surprise you, but I want to explain why this is the perfect time to take on this opportunity with this team. In fact, that’s probably the best way to break this down. To explain why I’d leave the world of infrastructure and code for the world of data and analytics, let’s explore the timing...
Learn how to solve the problem of keeping files in sync between multiple Docker containers. In his session at 16th Cloud Expo, Aaron Brongersma, Senior Infrastructure Engineer at Modulus, discussed using rsync, GlusterFS, EBS and Bit Torrent Sync. He broke down the tools that are needed to help create a seamless user experience. In the end, can we have an environment where we can easily move Docker containers, servers, and volumes without impacting our applications? He shared his results so yo...
Auto-scaling environments, micro-service architectures and globally-distributed teams are just three common examples of why organizations today need automation and interoperability more than ever. But is interoperability something we simply start doing, or does it require a reexamination of our processes? And can we really improve our processes without first making interoperability a requirement for how we choose our tools?
Cloud Migration Management (CMM) refers to the best practices for planning and managing migration of IT systems from a legacy platform to a Cloud Provider through a combination professional services consulting and software tools. A Cloud migration project can be a relatively simple exercise, where applications are migrated ‘as is’, to gain benefits such as elastic capacity and utility pricing, but without making any changes to the application architecture, software development methods or busine...
The Internet of Things. Cloud. Big Data. Real-Time Analytics. To those who do not quite understand what these phrases mean (and let’s be honest, that’s likely to be a large portion of the world), words like “IoT” and “Big Data” are just buzzwords. The truth is, the Internet of Things encompasses much more than jargon and predictions of connected devices. According to Parker Trewin, Senior Director of Content and Communications of Aria Systems, “IoT is big news because it ups the ante: Reach out ...
At DevOps Summit NY there’s been a whole lot of talk about not just DevOps, but containers, IoT, and microservices. Sessions focused not just on the cultural shift needed to grow at scale with a DevOps approach, but also made sure to include the network ”plumbing” needed to ensure success as applications decompose into the microservice architectures enabling rapid growth and support for the Internet of (Every)Things.
Our guest on the podcast this week is Adrian Cockcroft, Technology Fellow at Battery Ventures. We discuss what makes Docker and Netflix highly successful, especially through their use of well-designed IT architecture and DevOps.