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CAPEX, OPEX, and the financial leaks that drain your business

Insights_Guest on ‎09-28-2015 09:00 AM

By: Joe Panettieri

 

In the ongoing CAPEX vs. OPEX IT discussion, a key point often is overlooked: both models require proper planning to avoid financial waste.

 

Think of it this way:

  • Spend too much on CAPEX infrastructure, and you could squander dollars that could've been spent on the latest on-demand cloud services.
  • Spend too much on OPEX and you could have a difficult time building a business case for a modern, converged infrastructure that pays long-term dividends (reduced IT support costs, improved self-service, and more).

Two key goals

Most executive suites and corporate IT departments share a common goal: to shift budget from IT maintenance to IT innovations that bolster customer experience, engagement revenue, and profits. But slicing up the IT budget (across CAPEX and OPEX) to meet innovation goals isn't easy.

 

Moreover, there's a second goal you should consider. It involves shifting the IT risk from your company to your vendor's balance sheet. In other words, explore solutions where the vendor assumes the bulk of the risk—the heavy R&D, the non-stop maintenance, and the IT management.

 

Vendors are willing to assume the risk because they believe they can earn and retain more and more of your business on a recurring basis. Ideally, you're merely responsible for a predictable monthly payment, and your data or systems are easily migrated to another vendor if service level agreements (SLAs) aren't met.

 

Getting started

As a first step toward proper CAPEX/OPEX budgeting, examine your existing infrastructure and explore these five questions:

 

1. What are your organization's current utilization rates? Make sure you look at servers, storage, and network capacity.

    • Are your systems underutilized, over-utilized, or just right?
    • Assuming no system upgrades, how might the utilization rates change over the next three to five years?

 

2. Assuming you have CAPEX IT assets...

    • Are those assets nearly new and set for several more years of depreciation?
    • Or are the assets nearing the end of their depreciation cycle?

 

3. What are your organization's core applications?

    • Where do they stand in terms of reliability, scalability, innovation, and ability to meet the needs of your users?
    • What type of maintenance and service contracts are in place for each application?

 

4. What are your must-haves?

    • What applications and capabilities does your business absolutely need to deploy in the next year?
    • Now, what additional applications and capabilities will you need in the next 18 to 36 months?

 

5. What would be nice to have?

    • If you freed up even more budget, what other IT capabilities and applications would you add to your service catalog?

 

Problems and solutions

Now that you have a complete view of your infrastructure and applications, you're beginning to see the total cost of ownership for each piece of the puzzle. Armed with that data, pursue the following priorities:

 

1. Infrastructure needs: Even as some applications shift to the cloud, enterprises continue to invest heavily in modern IT infrastructure—converged servers, storage, and network resources that are virtualized, flexible, and scalable.

 

Employees and customers now expect a cloud experience when they use your corporate applications, and that consumer-like experience requires a modern IT infrastructure. At first glance, that means CAPEX investments. But don't forget: you can also leverage leasing and hardware-as-a-service payment models to shift your on-premise data center spending toward an OPEX model.

 

Additional considerations:

    • If your data center infrastructure—your hardware—is currently underutilized, you likely have the capacity to move ahead with automation projects that ease IT management and introduce self-service capabilities to employees.
    • If your data center infrastructure is over-utilized, consider offloading some workloads to a public cloud or a private cloud running in a service provider's data center. This will buy you some time as you consider your longer-term on-premise needs.

2. Pure cloud applications: Some companies now consider customer relationship management (CRM) and email to be no-brainer cloud applications. In this scenario, your destination for CRM or email is clear (the cloud). Your payment model for the cloud service is also clear (OPEX). But don't forget: a proper enterprise application migration to the cloud often requires third-party guidance.

 

Be sure to explore OPEX pricing models (per user vs. consumption) and contract terms (monthly with no commitment vs. annual with a three-year commitment, etc.) to ensure you're comfortable with your company's overall budget commitment.

 

3 . Pure on-premise applications

Let's face it. Some applications will never shift from your corporate data center to the public cloud, usually due to concerns about privacy, compliance, security, or customized code. In that scenario, application upgrades will likely involve CAPEX licensing—but that's changing. More and more software companies now offer pay-as-you-go options for on-premise deployments.

 

Either way, you should carefully study the contract terms to see just how much money you'll need to allocate for application modernization, maintenance, and deployments.

 

4. Hybrid ties it all together

In most cases, you'll ultimately end up with a hybrid approach, both in terms of your spending (a mix of OPEX and CAPEX) and your deployment locations (on-premise or in the cloud). Here, OPEX spending can solve your hybrid cloud management headaches. Instead of trying to track all IT assets, turn that responsibility over to a qualified service provider.

 

The bottom line

Take an accurate inventory of your existing infrastructure and applications, and determine their ongoing costs across your CAPEX and OPEX budgets. Next, determine if those systems are under- or over-utilized.

 

Whether it's CAPEX or OPEX, chances are you're overlooking some existing IT costs that you can eliminate. Now, you can shift that sum toward new innovations and shift the risk to your vendor's balance sheet.

 

For more on IT consumption models, read the whitepaper Demand More from Data Center Management Services.

 

 

Joe Panettieri

 

Joe Panettieri is co-founder and Content Czar for ChannelE2E (www.ChannelE2E.com), which tracks IT service providers from Entrepreneur to Exit (E2E). Panettieri has more than 20 years experience as a media entrepreneur covering enterprise, midmarket and small business IT issues.

Connect with Joe:

  @JoePanettieri

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Insights_Guest

Comments
Tricia Andrew
on ‎10-12-2015 05:25 AM

Hi Joe,
This sure helps guide a current project of our company that is trying to set up an integrated corporate database... any more experienced comments for these types  of projects? I work in the oil & gas business.

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