Over the past decade, technology has overshadowed and outperformed almost every other core business tool in terms of impact and disruptive influence. Unsurprisingly, enterprise technology – and its management – has become a key business driver and the top priority for every executive.
In many cases, the rise of enterprise tech has changed the relationship between Chief Information Officers and their financial counterparts, Chief Financial Officers. Today, every CIO has had to face the CFO at one time or another in relation to a major technology procurement decision. The CIO wants to invest and stay ahead of the tech curve, while the CFO is trying to manage budgets and streamline operations.
In this scenario, it’s important to note that the technology decision itself is just one component to consider. More and more, how businesses choose to pay for it is becoming an additional factor.
Planning for the Long Term
Without a doubt, there needs to be a clear separation between capital expenditure and operational expenditure.
Capital expenditure tends to be major investments in goods, which show up on the balance sheet and are depreciated over the life of the asset. This depreciation – for IT equipment – is typically reflected over three years.
Operating expenditure shows up on the monthly management accounts as an expense, and often doesn’t result in an asset that the business owns.
In today’s disruptive business environment, operating expenses are better suited for organisations anticipating rapid growth or changes in technology requirements. Being burdened with an asset that might be out of date in 12 months has rightfully changed the way businesses approach depreciation and purchasing decisions.
Bernard Golden, a columnist for CIO.com, notes: “Once you have purchased a capital good, you’re stuck with it, as anyone who has purchased a car understands; even if you’re no longer excited about owning it, the finance company still expects a monthly payment. By contrast, if you rent a car, you are committed to it only if you want to use it – and once you’ve paid for that use, you have no further financial obligation.”
What are the key business needs?
The decision to select OPEX over CAPEX (or vice versa) as a way of defining technology spend should be based on a clearer understanding of the role of capital expenditure within your business – but also the role (and expected life) of the item, software or service you are considering.
Critically, you’ll want to consider the cost of maintenance and support.
If, for example, you are considering a Network-Attached Storage Device that is essentially a box of hard drives you can dump data onto, then support and maintenance will be minimal and CAPEX might be the right decision. If, on the other hand, you are considering a Mail Server that is going to need constant changes, updates and support then you are probably better off ‘renting’ a mail solution like Google Mail or Microsoft’s Office 365. Most of the support costs disappear, updates are automatic and you can make changes yourself using simple web control panels.
From a financial perspective, it used to be easy to decide on CAPEX vs OPEX. It was simply a matter of how much cash was on hand and how much deprecation you wanted (or didn’t want) to put through the accounts going forward. Today, for IT specifically, this decision is not so straightforward and the CIO and CFO need to understand each other’s arguments in detail.
A Checklist to Consider…
In summary, here are some aspects to keep in mind…
- Which technology tools and applications are necessary (or desirable) for your business needs today?
- Can they be Cloud-based?
- What is your organisation’s cash position over the expected life of the tool or application?
- Is the tool or application something you will need indefinitely?
- Are there more productive aspects of your business where you could spend CAPEX?
- Does your industry have any standards or regulations that require you to own and control your data?