CapEx vs OpEx in cloud computing

Simon Edward • 6 September 2024

Could shifting from a CapEx to an OpEx model of cloud computing help your business grow? Learn more.

CapEx and OpEx are two models of accounting. One looks at investment in hardware, buildings and other physical assets. The other covers usage, maintenance and subscriptions.

Every business's expenses will combine CapEx and OpEx. But in recent years, there's been a tendency to shift spending from CapEx to OpEx. This has been especially true in the world of cloud computing.

This has several dimensions. First, there's been the extraordinary wide-scale migration from on-premise servers to public or hybrid cloud environments – a trend that's been in motion over the last decade, but which got a boost during the pandemic.

Secondly, there's the sprawling family of "aas" or "as-a-service" solutions. This is where you get access to a service on a subscription basis. Just as Netflix is Entertainment-as-a-Service, so businesses now pay monthly fees for Software-as-a-Service (SaaS), Networking-as-a-Service (NaaS), Infrastructure-as-a-Service (IaaS) and more.

In the business world, there's no one way to do anything. That's part of the fun, part of the challenge and part of the stress. But in our opinion, this shift from CapEx to OpEx introduces a greater degree of flexibility and cost-effectiveness into businesses of all shapes and sizes.

Before we dive into the details, let's take a look at the key differences between CapEx and OpEx models of cloud computing.

The differences between CapEx and OpEx

CapEx, or "capital expenditure", is money spent by a business on fixed assets – things like buildings, machines and equipment. Once bought, they need to be maintained and upgraded. These costs of upkeep also fall under the CapEx banner.

In the cloud computing world, on-premise data centres, software licences and networking hardware are examples of CapEx.

Typically, this kind of investment requires a large upfront payment followed by mortgage-style repayments.

Advocates for on-site, company-owned hardware argue that CapEx gives you greater administrative control and can save you money in the long run.

Critics, however, point to its inflexibility. It's not just that it can be hard to allocate resources based on demand – it's also the so-called "legacy trap". Once you've bought a piece of hardware, you're going to be stuck with it for a while, even as it gets overtaken by newer technologies.

OpEx, by contrast, refers to ongoing spending that keeps those fixed assets running. We're talking usage fees, monthly subscriptions and maintenance costs.

Unlike CapEx, OpEx lets you use equipment that's effectively beyond your price range. Instead of buying a nice but mediocre car, you get to rent the latest hybrid vehicle.

You also get predictable billing. By offloading the investment into infrastructure and maintenance onto a third party, you're washing your hands of maintenance charges.

Finally, you get to allocate resources on demand, scaling up and down as required. This flexibility is difficult, if not impossible, to achieve with fixed physical assets like servers.

It's not an either/or choice. All businesses will use a patchwork of CapEx and OpEx expenses. But when it comes to computing, OpEx is increasingly used – and it's used, we would argue, for good reasons.

Example one: data centres

An on-premise data centre is a classic case of CapEx. It gives you security and administrative control. But it costs a lot to install, a lot to maintain and a lot to replace.

If your on-premise data centre goes down, it's going to create downtime while IT drops everything to fix it.

On top of that, it's challenging to scale. Whether business is booming or you're cutting back, you should be paying for the compute, storage and networking resources you're using. Instead, businesses with physical hardware often over-provision and underuse their servers.

This is a key use case for OpEx in cloud computing. By shifting to a public cloud or hybrid cloud model, you get all of the computing power you're used to, but now with scalability, resource allocation flexibility and no emergency payments when your machine blows a gasket.

Example two: networking as a service

When future historians write about the 2020s, they're bound to mention one thing: the rise of remote and hybrid working.

This quiet revolution has changed the way we do business. It's created new possibilities and new challenges. But it's also changed the way we do networking.

Rewind to the early 2000s and most companies had fixed, contained networks that existed within a building or series of buildings. Access permissions could be granted on the basis of a username and a password. Nine times out of 10, one member of staff would get one device to use.

To say that things have changed would be an understatement. Even small businesses now have employees using multiple devices in multiple locations as a given.

This has helped businesses save money and give their workers greater flexibility. But it's also created novel challenges for networking.

Businesses now need heightened security and the ability to grant tiered access permissions. This is something that networking-as-a-service, or NaaS, can provide in spades.

But they also need the ability to scale resources up and down in response to demand. It's rare for a business to use the same level of resources all year round – but it's extremely common for them to pay for the same amount regardless of usage.

NaaS puts an end to this by letting businesses allocate resources flexibly. Busy sales period? Spike in visits to your website? You can bump up your resources with ease – something that simply isn't possible with a CapEx model of network provision.

Ascend Cloud Solutions

Based in Ireland, Ascend is a trusted cloud solutions provider that works with global organisations of all sizes. Our services include cloud migration consulting, cloud cost optimisation and IaaS management – and we're constantly expanding our offering to help you accelerate and exploit your digital transformation.

Want to find out how we can help your business grow? Contact a member of our friendly, knowledgeable team today.

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