There has been a longstanding tradition in most IT departments to want to own the technology they deploy. Changes in both the economy and technology in recent years, however, are putting pressure on this tradition.
CFOs, in particular, want to shift more of the costs associated with IT from the capital expenditure (capex) budget to the operational expense (opex) budget. Accomplishing this objective is much more than just an accounting maneuver — it requires a fundamental change in the way IT is procured and financed.
In this column, I look at why CFO’s are pushing this change and point out some of the advantages for CIOs who help make it happen. But, first some background:
CFO’s manage two distinct budgets. The first is the opex budget for things you rent or purchase in increments like payroll, utilities or maintenance. Operational expenses are more controllable since they are typically paid for monthly. If sales go up or down, generally you can gear these expenses accordingly.
The second is a capex budget. Capital expenditures are generally big ticket items you buy to own including buildings, servers and software. These tend to arise every few years and have a useful life beyond 12 months. Capex is budgeted once per year and when an investment is made you’re locked into it.
The key difference between the two budgets comes down to who owns the technology and how it’s financed. With capex, you own the assets and may need some outside financing. With opex, someone else owns and finances the technology and you just pay to use it.
Changing realities/changing priorities
Capital budgets were clearly scaled down the past couple years as people held off refreshing IT assets amidst economic uncertainty. While that trend is now reversing, there are many more options available today to refresh your technology including leasing, outsourcing, SaaS and cloud computing. All these options help you avoid technology ownership and shift things into the opex budget. As a result, alert CIO’s aren’t just starting refresh cycles over where they left off, instead they are looking at new ways to source their IT requirements.
In fact, most companies will soon start their annual budget cycle, so now is the right time to better understand these options. If you can find ways to rent versus own, and can get those monthly expenses provisioned in next year’s opex budget, it’s proven that IT funding becomes more sustainable and secure. It’s also true this improves your flexibility to swap suppliers as business demands change.
Benefits for IT
CFOs today are increasingly pushing to fund technology as opex costs to avoid financing requirements and risk. But there are also very clear benefits for IT leaders:
First off, when you want your CFO to approve a technology project, presenting both opex (rental or services) and capex (ownership) options helps demonstrate you’ve considered financial implications along with the technical ones. That immediately helps approval odds with any CFO.
Second, by getting long-term IT costs woven into the annual opex budget, they become financially positioned alongside your other core costs of sales. That helps IT be viewed as an essential cost of doing business and less hooked to large rounds of investment.
Finally, when your sourcing commitments become more flexible, you can more quickly shift to engage in new technology opportunities as they arise. That’s vital for IT staff to be viewed as business partners and not just a cost center.
Many IT organizations are working to internally re-brand themselves and demonstrate how they help grow the business. An important trick to this is being flexible in how you invest limited IT funds. That’s exactly why pay-as-you-go operating expense options are winning more IT decisions today.
In my next column, I’ll look at some of the specific ways IT departments are shifting their expenses from capex to opex, including lease financing, infrastructure sharing, non-core outsourcing, software as a service (SaaS), and cloud computing.
Greg Baker is the chief financial officer for Logicalis, an international provider of integrated information and communications technology solutions and services, where he oversees finance, accounting, treasury and strategic planning. Prior to joining Logicalis, Mr. Baker held key finance positions with Thomson Reuters, a Tier-1 automotive supplier, private equity firm Talon LLC, and PricewaterhouseCoopers.