I just read yet another so-called white paper touting the advantages of an OpEx-centric approach to datacenter services. The message is that you have to be an idiot if you actually buy IT infrastructure rather than rent it. It further stated that you can save loads of money and have fewer headaches with an OpEx expense versus a CapEx investment.
Is OpEx really better? The answer… it depends.
If your company is small, growing, and wants to maximize cash flow, then OpEx is your likely answer. In this specific case, it will be more advantageous to lease, e.g., lease an email server from GoDaddy.com rather than buy a Proliant server with MS Exchange and manage it day-to-day.
If your company’s exit strategy is ultimately to be purchased, OpEx again is your likely answer. Your company doesn’t want to saddle its books and salability with expensive, obsolete-the-second-you-bought-it hardware.
So when is a CapEx investment strategy the best way to go? Honestly, most of the time. If your firm is an established, profitable entity and you’re on a Built to Last[i] (vs. built to flip) trajectory, you should be CapEx-focused. Purchasing a piece of capital equipment outright is usually better if 1) you keep it and use it over a several year period and/or 2) you qualify for a one-time capital full-depreciation of a capital asset (as described in Section 179 of the IRS tax code).
How about a real life comparison—leasing a car vs. buying a car. If like me, you like to buy cool cars and then drive them into the ground, you would write a check, i.e., CapEx, for the car, depreciate it, and write off the operating expenses (gas, repairs, etc.). If you are like my better half, you would lease, i.e., OpEx, a more modest car and write off the lease payments and mileage expenses. In the end, our strategies work best for each of us.
Is there a better alternative out there? HyEx is a term I have coined for using a combination of CapEx and OpEx. I strongly suggest that most companies which invest in IT infrastructure seriously consider using a combination of CapEx investment and OpEx expense or…HyEx.
Here is an example. If your company is a mid-sized to large-sized company and your data centers run out of capacity during peak transaction periods at month-end or end-of-year, you may want to lease extra capacity to allow for “bursting” during those times. (Rumor has it that Cisco’s Intelligent Automation for Cloud will one day let set up a menu-driven burst-over process with public cloud providers such as Amazon (EC2), Rackspace, Savvis, and others, based on price, response time, or other required value. To me, that is the epitome of a hybrid cloud.
So there you have it. The next time someone tells you that their product is better because it eliminates the evil CapEx cost, ask that person to do a TCO including tax advantages, the time value of money and other factors. Then just for fun, bet him or her a beer you can prove them wrong – you will win every time with HyEx in your back pocket.
[i] Jim Collins wrote an excellent book that highlighted the values of companies that were built for the long-term, companies like HP, Disney, and Marriott. More information can be found at this site: http://www.jimcollins.com/article_topics/articles/building-companies.html