The Many Cost Advantages of the Cloud’s OpEx Model

The pandemic fundamentally changed how businesses use technology — as well as how they pay for it. Increased cloud usage not only allowed companies to accelerate IT innovation to support new operational requirements, but provided the budget stability that made such investments practical during a time of unprecedented uncertainty.

More than 60 percent of organizations preserved financial flexibility during the pandemic by shifting more of their IT spending from capital expenditures (CapEx) to operating expenses (OpEx), according to a new report from Forrester. Such a shift preserves cash flow by eliminating the upfront costs of purchasing IT equipment in favor of a pay-as-you-go OpEx model.

Cloud-based technology-as-a-service solutions have been driving the shift to OpEx IT spending for a decade or more, but the pandemic accelerated the trend. Analysts estimate global cloud usage has more than doubled since 2020 as organizations moved to make services and applications available to the remote workforce.

Budget and Tax Benefits

Budget optimization has always been one of the compelling reasons for moving workloads and applications to the cloud. The most obvious benefit is eliminating many of the costs involved with acquiring, deploying and managing in-house technology assets. This makes the cloud up to 80 percent more cost-effective than owning and managing everything within an internal data center, according to researchers at the University of California, Berkeley.

Software-as-a-Service (SaaS) is perhaps the most common way organizations reduce upfront expenses through the cloud. Traditional pre-packaged software has significant costs on top of the purchase price, including per-user license fees, supporting IT infrastructure and ongoing maintenance. In addition, IT service providers are often needed for installation expertise and troubleshooting. With the subscription model, those costs are all transferred to the provider.

OpEx also creates important tax advantages. Purchasing IT equipment requires more complex accounting practices over the life of the assets. For tax purposes, these expenditures must be depreciated and deducted for an extended number of years. However, the process of measuring those costs over an extended period can become quite complicated, requiring adjustments for discounting rates, tax rates, inflation rates, technology changes and other quantifiable factors.

OpEx accounting is much simpler and usually more cost-efficient because operating expenses can be fully deducted in the year they are incurred. This reduces income taxes for the year and produces immediate cashflow benefits.

Operational Flexibility

The rapidly changing nature of technology is another reason to reconsider CapEx technology purchases. An OpEx approach provides a hedge against the risk of IT purchases that prove to be inadequate or ineffective — Standish Group analysts estimate that two-thirds of all IT projects end in partial or total failure. Cloud subscriptions reduce the risk that the expensive hardware and capacity you purchased won’t ultimately meet your needs. In the cloud, you can simply move on to another solution or a different provider without worrying about protecting considerable investments in on-premises technologies.

More than 60 percent of organizations preserved financial flexibility during the pandemic by shifting more of their IT spending from capital expenditures (CapEx) to operating expenses (OpEx).

The OpEx approach delivers several other types of operational and budget benefits:

• It fosters innovation by allowing organizations to take on projects that would be cost-prohibitive if they required software or hardware purchases.
• It eliminates complexity, enabling users to perform sophisticated tasks without requiring a great deal of technical knowledge.
• It enables rapid deployment of services or applications to improve time to value.
• It eliminates CapEx purchases of equipment or capacity that might never be used.

There are certain instances in which CapEx technology purchases make more sense, usually in situations where organizations require more control over sensitive or mission-critical workloads. For the vast majority of IT services, however, the cloud’s pay-as-you-go option will continue to deliver important pricing and flexibility advantages.

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