How the Cloud Is Changing the Way Companies Approach Budgeting for Capital Investments

Your IT department no longer has to make the “big ask” for money to keep the organization competitive.

“The CIO called and said that the two of you need to have a ‘talk’.”  That pretty much sums up the warning that CEO’s would get once a year from their administrative assistant around budgeting time.  It wasn’t that IT departments were known for extravagance. Investing in technology to stay competitive, though, has never been an inexpensive capital undertaking.

The cloud changed all that. It’s created a monumental shift in the financial implications of investing in changing technology. The focus has moved from capital expense to operating expenses, which in turn has created a domino effect on how organizations approach technology implementation and migration.

This change does require companies to completely re-think how they approach budgeting in this area.

Operating versus capital

Business expenses have different tax implications than capital expenses (CAPEX). The cost of implementing a new technology represents an investment in the business. As most managers understand, a capital asset is depreciated on the books over time, while an operating expense is generally expensed in the period incurred.

The cloud allows you to convert CAPEX into OPEX.

Clouding your thinking

The majority of Fortune 500 companies have already moved some of their technologies and services to the cloud. In fact, IT spending on cloud services is predicted to hit $216 billion by 2020. But by shifting to the cloud, companies have had to compensate for the financial implications that result from moving from capital to operating expenses.

They’ve also had to develop an understanding of the cost calculations associated with cloud based services because they occur over time as opposed to in a single lump sum. This is important, because it doesn’t matter if it’s CAPEX or OPEX if the budget assumption is based on incorrect information.

There are important items to remember when budgeting for cloud services.

  1. Migration to the cloud creates an “all you can eat” environment. Unlike your local restaurant, however, you don’t just pay one price for cloud computing capacity. It’s more like having your plate weighed and being charged again each time you go back for more food.

It’s important for IT leaders to understand and budget capacity and usage requirements, and then put programs in place to stay within this operating expense.

  1. “Sorry, we can’t help you with that right now because there are other requests for those resources.” That’s what you may have heard when servers were located in-house. Capacity was a finite resource, and departments had to queue up for it. Cloud-based resources remove that barrier—and it can be a mixed blessing. What happens to OPEX in this area if anybody can use it any time they want, for any reason?

IT organizations won’t shed the responsibility of helping to determine the usage of resources. In fact, they may discover the necessity to heighten their diligence on the use of a resource that can expand—and cost accordingly—as much as desired.

  1. The challenges of IT management don’t disappear just because the cloud replaces physical infrastructure. In many cases, the tools and procedures to manage a hybrid of cloud and on premise resources increase.

There’s a redundancy factor that comes into play. IT departments have to take this into consideration with planning OPEX for cloud migration.

This massive switch from CAPEX to OPEX often can’t be abruptly instituted by a company. It usually has to be a transition over several years, so that the older funding model has the chance to evolve and an understanding of capacity requirements and usage patterns replace it over time.

Upside-down

IT infrastructure that was once a CAPEX has now become OPEX, as the cloud delivers software as a service (SaaS) and infrastructure-as-a-service (think Amazon Web Services). Third-party cloud service providers are responsible for infrastructure, equipment, and licenses—the stuff that companies used to have to make room for in their budgets.

The benefit to organizations is that they can focus on their core competencies, instead of chasing after technology. The IT department must still be the facilitator of this process, but it causes an interesting collaborative effect between IT and other departmental business heads to ensure their individual and collective needs are being met.

An IT department’s biggest challenge used to be justifying CAPEX requests which were accumulated across the company.  To be fair, the capital investment would ultimately benefit the entire organization, but somebody—and it was usually the CIO—had to make the brave request for the big check.

Cloud-based services have transformed IT budgets into line item operating expenses that can be attributed to the departments that actually use the services. In some cases, organizations have discovered that instead of a single IT budget, they now have an IT line item for each department. It’s a fair way to distribute the cost of IT across an organization.

The Cloud has not only changed the way in which services are delivered but the way organizations budget for them.  nexVortex has been delivering Cloud Communication Services for over 11 years.  If you are looking to move your voice services to the Cloud, give us a call and let us see how we can bring our experience to bear for you as you make the migration.