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CAPEX vs OPEX: What is the Most Effective Cloud Cost Management Strategy?

Cloud | Posted on April 29, 2019 by Softchoice Advisor

This article has been updated as of June 2020.  

One of the primary value propositions of a cloud adoption or migration is to shift from a capital expenditure (CAPEX) to an operating expense (OPEX) model.

In fact, respondents to an IDG Research survey cited cost savings as one of the top three benefits of the cloud. Those surveyed pointed to lower cloud storage costs and easier compliance as important benefits. This trend highlights the direct and indirect cost benefits of an OPEX model:

  • Instead of buying their own storage in advance without knowing if they have bought too much or too little, they can instead adjust their consumption up or down, in line with current business requirements.
  • By offloading management responsibilities to a cloud service provider (CSP), they free up IT personnel to work on other projects or priorities, while also lowering the risk of letting a critical asset become outdated or going unpatched.

Jumping into a cloud migration without the right planning, however, is like signing a contract without reading the fine print. What seemed straightforward can quickly become much more complicated and expensive than expected.

Where organizations foresaw big cost savings and other ROI from their cloud spend often find themselves wrangling with multiple technical and financial issues, especially as they confront the complexity of hybrid and multicloud environments.

It’s common for organizations to realize their expected savings in the cloud. Cost reduction is not guaranteed. Ensuring cost efficiency in the cloud requires adept planning in tandem with effective cloud cost management. Proper planning helps avoid surprises by providing clear insights into cloud usage and cost drivers from the start.

Below we examine the most important factors when considering a CAPEX or OPEX model for your workloads.

CAPEX, OPEX and the Economics of Cloud

CAPEX has been the standard model of traditional IT procurement, while OPEX is how cloud computing services are procured. Each has different implications regarding cost, control and operational flexibility.

The public cloud is often associated with cost savings because it doesn’t require the kind of upfront capital investments seen in the traditional data center. But it’s not always the most economical option. Fixed investments in IT equipment, such as for a private cloud, can be less expensive in certain cases. Meanwhile, as new economic pressures make containing costs a high priority, the cost to continue operating an owned data center would be lower than to spin up new workloads in the cloud, for example.

Before making the leap to the cloud, it’s advisable to have:

  1. A rationale other than cost reduction – without the right planning and workload placement decisions, costs to migrate workloads to the cloud can increase.
  2. A proper cloud governance model – as organizations can procure and consume public cloud resources much easier than their on-premise counterparts, losing track of workloads and associated costs becomes a challenge.

One of the prime reasons for cloud migration is the overall operational flexibility, beyond just potential savings, unlocked by the OpEx model.

Comparing the Cost Models

Before we explore the need for a proper cloud cost management strategy, let’s compare the pros and cons of both CAPEX and OPEX models:

CAPEX

Under CAPEX procurement, organizations make a significant upfront investment to acquire and maintain critical IT assets. This comes with sunk costs that make it difficult to pivot as business requirements evolve and which can impede or kill other projects in need of funds.

“Many organizations also overprovision on-premise resources to handle peak demands, but often this results in expensive excess capacity that lays dormant.”

However, if a CAPEX asset’s useful life extends beyond a year, organizations can often pay for them through depreciation. This allows for tax deductions as the purchase accumulates wear and tear. You also have full control of your resources without having to rely heavily on an outside provider. Other constraints include, but aren’t limited to:

  • The physical data center footprint required
  • Steady depreciation
  • Complex technical setup
  • Managing infrastructure lifecycle from acquisition to disposition

These limitations are what make cloud an appealing upgrade option in the first place. However, data center infrastructure still has an important place for many organizations as they are being used to build their hybrid and multicloud strategies.

OPEX

With OPEX technologies like SaaS applications and public cloud infrastructure, organizations gain much more flexibility, as assets are billed per-usage on a subscription basis.

In the as-a-service structure, capacity being scalable to current demand allows for future growth. Costs are driven by consumption, meaning less risk of over-provisioning. However, it’s important to use a solution that’s properly sized to actual demand and supported by automation, to avoid runaway spending.

Meanwhile, it becomes easier to pivot projects due to the availability of on-demand resources and the option to use bursting and elasticity to scale capacity up and down as your needs change.

However, Line-of-business units can also take ownership of budgets outside the exclusive purview and control of the IT department. At the same time, organizations rely on cloud provider infrastructure and tools. This makes it difficult to monitor cloud performance in the context of your specific business requirements.

Without the in place, an OPEX model can run up significant, especially if there is no accountability for users or optimizations within the cloud services budget. Clear insight is needed into the characteristics of each workload, along with a plan for managing the variable costs and usage levels of OPEX services.

How Multicloud Complicates the CAPEX vs. OPEX Comparison

Multicloud environments, combining public or private cloud resources from several providers, raise the stakes surrounding this due diligence.

An August 2019 survey from IDC found that over 90% of respondents were using “multiple infrastructure clouds.” Most of this group were relying on a mix of public and private cloud resources. These types of setups can make it challenging to control cloud spending, as they mix OPEX and CAPEX expenses from multiple providers.

Let’s say a hypothetical company set up a multicloud environment to improve its operational flexibility and control costs. Realizing these benefits would require overcoming possible complications such as:

  • Establishing accountability: Who is authorized to deploy and decommission workloads? Are costly “shadow IT” workloads being routinely initiated?
  • Gaining visibility: What’s being consumed/used, and by whom? Are there unused instances that can be shut down?
  • Managing variability: Are highly variable workloads driving up OpEx costs? Would they be more economical under a CapEx model?

Left unchecked, issues like these make OPEX more expensive than CAPEX. Indeed, a Bain & Co. survey of IT decision-makers found that similar or higher costs were the biggest disappointment with cloud transitions. A specific problem like a bunch of zombie instances or just the general ease with which OpEx resources can be marshaled can lead to significant cloud expenses.

Resolving the CAPEX vs. OPEX Debate

The right answer to “Should I rely on CapEx or OpEx?” will depend on the organization, and many companies have in fact opted to use both to differing degrees. But controlling OpEx in particular will become a more pressing concern as overall cloud usage continues to rise. Fortunately, there are many good options for doing so.

A gap assessment is useful for terminating extraneous resources and implementing specific functionality such as cloud bursting to economically cover surges in demand. It provides insight into existing expenses, so that they can become baselines for the cloud transition.

Hybrid multicloud management platforms are also invaluable in providing a comprehensive view of complex cloud environments (like multicloud ones) and their costs. This consolidated data enables informed decision-making about the overall cloud cost management strategy, as well as tighter alignment of cloud usage with business requirements.

Our team of licensing and cloud engineers are ready to help you find efficiencies wherever you are in your journey from response to recovery.

Looking for further insights to help drive efficiency and optimize the infrastructure in your IT environment? 

Watch our webinar, “Cloud Cost Optimization: How to Avoid Overspend and Control Costs,” on-demand or connect with an expert.

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