|By Sunil Pathak||
|November 28, 2012 09:00 AM EST||
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:
- Shortage / Availability of capital
- High cost of capital
- Overall economic environment which impact investment decisions.
- Better use of available capital
- 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:
- Optimizing capital investment due to shortage / Availability of capital
- Optimize overall Cost of Capital
- Workaround the difficult economic environment which impact investment decisions.
- Investment Options at hand
- Better profit reporting to investors and increase shareholder value
- Higher value of assets on balance sheet
- 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
In their session at @ThingsExpo, Shyam Varan Nath, Principal Architect at GE, and Ibrahim Gokcen, who leads GE's advanced IoT analytics, focused on the Internet of Things / Industrial Internet and how to make it operational for business end-users. Learn about the challenges posed by machine and sensor data and how to marry it with enterprise data. They also discussed the tips and tricks to provide the Industrial Internet as an end-user consumable service using Big Data Analytics and Industrial C...
Jan. 30, 2015 01:00 AM EST Reads: 4,500
How do APIs and IoT relate? The answer is not as simple as merely adding an API on top of a dumb device, but rather about understanding the architectural patterns for implementing an IoT fabric. There are typically two or three trends: Exposing the device to a management framework Exposing that management framework to a business centric logic Exposing that business layer and data to end users. This last trend is the IoT stack, which involves a new shift in the separation of what stuff happe...
Jan. 30, 2015 12:30 AM EST Reads: 4,841
Log data provides the most granular view into what is happening across your systems, applications, and end users. Logs can show you where the issues are in real-time, and provide a historical trending view over time. Logs give you the whole picture. Logentries, a log management and analytics service built for the cloud, has announced a new integration with Slack, the team communication platform, to enable real-time system and application monitoring. Users of both services can now receive real-...
Jan. 29, 2015 11:45 PM EST Reads: 1,025
The 4th International DevOps Summit, co-located with16th International Cloud Expo – being held June 9-11, 2015, at the Javits Center in New York City, NY – announces that its Call for Papers is now open. Born out of proven success in agile development, cloud computing, and process automation, DevOps is a macro trend you cannot afford to miss. From showcase success stories from early adopters and web-scale businesses, DevOps is expanding to organizations of all sizes, including the world's large...
Jan. 29, 2015 10:00 PM EST Reads: 5,203
At 15th Cloud Expo, Shrikant Pattathil, Executive Vice President at Harbinger Systems, demos a video delivery platform that helps you do interactive videos. He discusses how Harbinger is accomplishing it in the cloud world, the problems they faced and the choices they made to get around these problems.
Jan. 29, 2015 09:15 PM EST Reads: 2,543
“Will Jaya is a direct source for server integration and storage solutions. If you are looking for any specific configurations for a project we can help you configure based on your needs and requirements," explained Netty Goya, CEO of Will Jaya, in this SYS-CON.tv interview at 15th Cloud Expo, held Nov 4–6, 2014, at the Santa Clara Convention Center in Santa Clara, CA.
Jan. 29, 2015 08:30 PM EST Reads: 2,492
“DevOps is really about the business. The business is under pressure today, competitively in the marketplace to respond to the expectations of the customer. The business is driving IT and the problem is that IT isn't responding fast enough," explained Mark Levy, Senior Product Marketing Manager at Serena Software, in this SYS-CON.tv interview at DevOps Summit, held Nov 4–6, 2014, at the Santa Clara Convention Center in Santa Clara, CA.
Jan. 29, 2015 07:00 PM EST Reads: 4,081
“The year of the cloud – we have no idea when it's really happening but we think it's happening now. For those technology providers like Zentera that are helping enterprises move to the cloud - it's been fun to watch," noted Mike Loftus, VP Product Management and Marketing at Zentera Systems, in this SYS-CON.tv interview at Cloud Expo, held Nov 4–6, 2014, at the Santa Clara Convention Center in Santa Clara, CA.
Jan. 29, 2015 07:00 PM EST Reads: 3,609
IoT is still a vague buzzword for many people. In his session at @ThingsExpo, Mike Kavis, Vice President & Principal Cloud Architect at Cloud Technology Partners, discussed the business value of IoT that goes far beyond the general public's perception that IoT is all about wearables and home consumer services. He also discussed how IoT is perceived by investors and how venture capitalist access this space. Other topics discussed were barriers to success, what is new, what is old, and what th...
Jan. 29, 2015 06:15 PM EST Reads: 5,454
The Internet of Things (IoT) is rapidly in the process of breaking from its heretofore relatively obscure enterprise applications (such as plant floor control and supply chain management) and going mainstream into the consumer space. More and more creative folks are interconnecting everyday products such as household items, mobile devices, appliances and cars, and unleashing new and imaginative scenarios. We are seeing a lot of excitement around applications in home automation, personal fitness,...
Jan. 29, 2015 06:00 PM EST Reads: 4,932
Dale Kim is the Director of Industry Solutions at MapR. His background includes a variety of technical and management roles at information technology companies. While his experience includes work with relational databases, much of his career pertains to non-relational data in the areas of search, content management, and NoSQL, and includes senior roles in technical marketing, sales engineering, and support engineering. Dale holds an MBA from Santa Clara University, and a BA in Computer Science f...
Jan. 29, 2015 06:00 PM EST Reads: 5,189
Entuity®, a provider of enterprise-class network management solutions, today announced that it solidifies its position as a market leader through global enterprise customer acquisitions and a refined channel strategy. In 2014, Entuity increased new license revenues in EMEA by over 75 percent, and LATAM by over 125 percent as customers embraced Entuity for its highly automated solution and unified architecture. Entuity’s refined channel strategy focuses on even deeper strategic alignment with ke...
Jan. 29, 2015 05:00 PM EST Reads: 819
The 3rd International Internet of @ThingsExpo, co-located with the 16th International Cloud Expo - to be held June 9-11, 2015, at the Javits Center in New York City, NY - announces that its Call for Papers is now open. The Internet of Things (IoT) is the biggest idea since the creation of the Worldwide Web more than 20 years ago.
Jan. 29, 2015 03:30 PM EST Reads: 5,120
Cloud Technology Partners on Wednesday announced it has been recognized by the Modern Infrastructure Impact Awards as one of the Best Amazon Web Services (AWS) Consulting Partners. Selected by the editors of TechTarget's SearchDataCenter.com, and by votes from customers and strategic channel partners, the companies acknowledged by the Modern Infrastructure Impact Awards represent the top providers of cloud consulting services for AWS including application migration, application development, inf...
Jan. 29, 2015 03:00 PM EST Reads: 2,486
“We help people build clusters, in the classical sense of the cluster. We help people put a full stack on top of every single one of those machines. We do the full bare metal install," explained Greg Bruno, Vice President of Engineering and co-founder of StackIQ, in this SYS-CON.tv interview at 15th Cloud Expo, held Nov 4–6, 2014, at the Santa Clara Convention Center in Santa Clara, CA.
Jan. 29, 2015 02:45 PM EST Reads: 4,086
"Blue Box has been around for 10-11 years, and last year we launched Blue Box Cloud. We like the term 'Private Cloud as a Service' because we think that embodies what we are launching as a product - it's a managed hosted private cloud," explained Giles Frith, Vice President of Customer Operations at Blue Box, in this SYS-CON.tv interview at DevOps Summit, held Nov 4–6, 2014, at the Santa Clara Convention Center in Santa Clara, CA.
Jan. 29, 2015 02:30 PM EST Reads: 4,126
In this demo at 15th Cloud Expo, John Meza, Product Engineer at Esri, showed how Esri products hook into Hadoop cluster to allow you to do spatial analysis on the spatial data within your cluster, and he demonstrated rendering from a data center with ArcGIS Pro, a new product that has a brand new rendering engine.
Jan. 29, 2015 02:30 PM EST Reads: 2,812
"People are a lot more knowledgeable about APIs now. There are two types of people who work with APIs - IT people who want to use APIs for something internal and the product managers who want to do something outside APIs for people to connect to them," explained Roberto Medrano, Executive Vice President at SOA Software, in this SYS-CON.tv interview at Cloud Expo, held Nov 4–6, 2014, at the Santa Clara Convention Center in Santa Clara, CA.
Jan. 29, 2015 02:30 PM EST Reads: 4,403
Performance is the intersection of power, agility, control, and choice. If you value performance, and more specifically consistent performance, you need to look beyond simple virtualized compute. Many factors need to be considered to create a truly performant environment. In his General Session at 15th Cloud Expo, Harold Hannon, Sr. Software Architect at SoftLayer, discussed how to take advantage of a multitude of compute options and platform features to make cloud the cornerstone of your onlin...
Jan. 29, 2015 02:15 PM EST Reads: 5,193
Hardware will never be more valuable than on the day it hits your loading dock. Each day new servers are not deployed to production the business is losing money. While Moore's Law is typically cited to explain the exponential density growth of chips, a critical consequence of this is rapid depreciation of servers. The hardware for clustered systems (e.g., Hadoop, OpenStack) tends to be significant capital expenses. In his session at Big Data Expo, Mason Katz, CTO and co-founder of StackIQ, disc...
Jan. 29, 2015 02:00 PM EST Reads: 4,959