CapEx, OpEx and Cloudy Accounting

The growing interest in colo and cloud computing for cost savings isn't a CapEx vs. OpEx issue, according to Geva Perry.

Cloud computingMany sources have said that the current economic climate will shift enterprise spending patterns, leading companies to forego cash-intensive data center construction projects in favor of colocation. Others suggest that cloud computing and its pay-as-you-go billing will be a major beneficiary of the economic crisis. These trends are often discussed in the context of capital expenditures, and the notion that companies want to shift capital expenses to their operating budgets.

Geva Perry, a cloud technologist with an MBA, says that's all wrong. Perry argues that those invoking CapEx and OpEx are confusing their accounting terminology, and adds two points:

  • There is nothing inherently financially beneficial in moving an expense from CapEx to OpEx.
  • There is nothing inherently financially beneficial to switching from an upfront investment to a cash outlay over time.

There's a lively discussion in the comments of Geva's post debating some of his assertions. I'm not an accountant, and I'm sure the particular benefits of CapEx vs. OpEx are often misunderstood or misstated. But I think the current issues in infrastructure cost management go deeper than the ROI of spending money up-front versus over time.

The availability of capital has changed the business landscape. Many companies simply don't have access to the borrowing that could support large up-front investments in infrastructure. Well-capitalized companies are working to conserve cash, not wanting to find themselves overextended should the lending drought persist over an extended period of time.

In this kind of credit crunch, the choice between a large up-front investment and a smaller cash outlay over time is often guided by the availability of capital, or whether an investment of that size can be approved. When operations are mission-critical, the cost differential between "renting" and buying may be less than the potential cost of a delay in expanding your operations.

For further reading on accounting and hosting, SoftLayer VP of accounting and finance Gary Kinman has a series of blog posts on the subject. See Hosting and GAAP Accounting, You Can't Judge Health by Net Income Alone, Current Ratio Punishes Hosting and More GAHAP.

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