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Define CapEx and OpEx as making sense of dollars

Source:  Michael Kloran
Designer: Michael Kloran

Rather than arguing OpEx versus CapEx, it's time to talk about CapEx and OpEx together. Some businesses rely more on CapEx IT spending, others more on OpEx, but virtually all have a mix of both.

In the simplest sense, capital expenditures (CapEx) are single payments in exchange for goods or services, while operational expenditures (OpEx) are ongoing expenses paid to maintain a service.

Business leaders define CapEx as one-time purchases that then depreciate in the organization's care. Data center servers are a classic capital expenditure. Businesses typically buy and deploy a fleet of servers, then depreciate them over a number of years in the data center.

We define OpEx as a recurring expense. Cloud-hosted servers are a classic operating expenditure. The business does not physically purchase and maintain the cloud servers, but rather pays a monthly or per-use fee to access them. There is no depreciation; if a server is not needed, it goes away, and the company may choose to pay for it again in the future.

With OpEx purchases, it's an oversimplification to say that you only pay for what you use when you use it; any administrator dealing with VM sprawl would agree. And without an asset management system, plenty of CapEx spending goes to waste.

Show off your understanding of OpEx versus CapEx as a matter of close IT alignment with business needs. A modern data center employee understands that some IT services are better handled outside of the server racks, while others will be less expensive in the long term with a big upfront investment in hardware and software resources. One such example is big data analytics, where many businesses store and crunch data on owned IT platforms to avoid the costs associated with network traffic to cloud-based big data processing services.

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Does OpEx ever save money over CapEx in IT purchasing scenarios?
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