Q

Determining capital expenditures versus operating expenditures

What factors do you take into account when determining capital expenditures versus operating expenditures?

Capital expenditures versus operating expenditures? What variables do you take into account regarding floor space,

staffing, leasing, power/cooling, software, etc? Do you have a key metric you follow, such as server cost per month or revenue per watt?

The first thing to take into account is how the organization views the two. It seems to be received wisdom that opex is always better, yet we find that many organizations still prefer a capex model, as this can be written off over time against tax. However, when trying to compare capex and opex, a full range of items does need to be included. Any capex project will still involve opex -- energy, building rent, taxes, maintenance, etc. -- so the overall lifetime cost has to include these.

When it comes to a key metric, then it is what makes most sense to you. If working on server cost per month, watch out for whether this is physical or virtual -- virtual servers tend to be spec'd on the small side. If per watt, make sure that this is not overly loaded to cover peripheral equipment, such as inefficient cooling systems or UPSes. If per amount of data stored or transferred, make sure that it is not peak measurement, but averaged out over the period. 

For most, a fixed-price agreement will make the most sense: Some will prefer a variable cost -- when workloads are cyclical, for example.

About the author:

Clive Longbottom is the co-founder and service director of IT research and analysis firm Quocirca, based in the U.K. Longbottom has more than 15 years of experience in the field. With a background in chemical engineering, he's worked on automation, control of hazardous substances, document management and knowledge management projects.
Clive.Longbottom@quocirca.com

This was first published in April 2013

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