Capex vs Opex: Five Must-dos Before You Take the Leap

Money being squeezed in viceFirst off, let’s get the basics out of the way.

Capex, or capital expense, is what you spend on purchasing anything needed to run your business for more than a year. This means that your company holds ownership of the product. We’ll not get into the financial niceties of tax and depreciation, but in general whatever you buy will depreciate in value over the years, except perhaps for real estate, artworks and stock. And even those can, depending upon market conditions.

Opex, or operating expense, is what you spend to use a product or service that you don’t own. Lease or rentals fall into this category. Salary paid to your employees and R&D also are classified as opex.

Old question: rent or buy?

It’s the classic debate of buy versus rent. If you buy, you control the asset to use as you please — but you pay a big chunk of precious dollars upfront. On the other hand, renting is easier on the pocket but it’s a perpetual cost that could, in the long run, work out more than if you’d bought the equipment outright.

However, the opportunity cost of the funds locked up by buying something could be incalculable — for instance, you could have deployed that cash into building a new product that could defray any rental expenses many times over. It’s a never-ending hand-wringing exercise best cut short by taking a very practical approach, keeping the bottom-line and profit-line always in sight.

The debate is raging once again these days because cloud computing has changed the rules of the game forever. For technology companies and especially for startups, Cloud is actually a thick silver lining that can bind together a flagging economy.

Add to this outsourcing your business processes, and your savings can directly be converted to profits.

Five things buyers should keep in mind when considering Cloud, or outsourcing business processes, or both.

1. Consider migration

Moving your house is always a headache, but sometimes it must be done. And admit it, you always find a ton of junk you never knew shared your home all these years.  If your company is already heavily invested in capex, ask your CFO to calculate the gains of migrating some or all of those investments to opex. It’s not easy but if done right, your company could benefit from both ability and agility. Startups must consider Cloud and BPO options from day one; this will free up scarce resources that can then be deployed for product or service development.  Be brutally level-headed about ownership. After all, you don’t want to buy every book you care to read if   you can just borrow it from the library.

2.    Build trust

Remember that it’s a relationship of mutual dependency, both with your cloud provider and with your BPO partner. As a buyer, you are relying on them to provide impeccable service as much as they need your business to survive and thrive. Ensure that they are trustworthy, follow fair business practices and are in for the long haul.

3.    Play fair, pay fair

Going for the lowest price isn’t always the best way to do business. You may save a bunch to start with but think about it: what kind of people or services can your BPO or cloud provider afford at those rates. Penny wise, pound foolish is not just a cliché, it’s a truism that can come back to bite you. Pay fair and ensure that your partners play fair.

4.    Keep track

Remember the time when everyone was talking about software inventory? Large companies that bought the latest software and also ran legacy systems were dismayed to find that nobody really knew how much of their purchases were being effectively used and how much was relegated to the virtual backyard. Licensed software does have a “use by” date, much like consumables or medicines, not least because better software comes along sooner than you’d imagine. Don’t make that same mistake again. Keep track of how much is being used and whether your business would run better with the newer software that’s just out in the market. Fortunately, with Cloud and BPO, automated tracking is possible.

5.    No compromises

Quality of service is paramount – make sure that just as you promise and deliver quality to your    customers, you expect the same from your Cloud or BPO provider.  Hold them accountable to strict SLAs and insist on security checks at regular intervals. Check that they have back-up plans and disaster recovery programs in place. Make sure they have provisions for redundancy for the time that you might experience a surge in demand. Crashing of servers during the Christmas shopping rush, for instance, is not an acceptable event anymore.

Thanks to Cloud and BPOs, the journey from capex to opex has begun in earnest. Can we say the road ahead will be paved with gold?

Post a Comment

Your email address will not be published.

( required )

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>