Capex to Opex: CAPEX and OPEX are investment modes of companies. While CAPEX refers to expenditures for the purchase of goods, OPEX refers to operating costs. In the world of Everything as a Service, the shift from CAPEX to OPEX is a much discussed topic. But what does Capex to Opex actually mean and how does it affect existing and new business models?
Definition of Capex to Opex
CAPEX and OPEX are acronyms for “Capital Expenditure” and “Operational Expenditure“. In the world of Everything as a Service, the shift from CAPEX to OPEX is a much-discussed topic. But what does Capex to Opex actually mean and how does it affect existing and new business models?
The way companies buy technology has been changing for years. The IT sector was the pioneer, but increasingly this change is spreading across all sectors and industries. The flexibility and efficiency of cloud services and cloud solutions, reliable predictability of managed IT services and many other as a service approaches are causing this change.
What are Capex and Opex?
CAPEX and OPEX are modes of investment by companies. While CAPEX refers to expenditures for the acquisition of goods, OPEX refers to operating costs. CAPEX occurs when a company needs to acquire goods to improve its production. It is related to investment in technology, equipment and machinery by companies. In contrast to CAPEX, OPEX refers to all operational costs: maintenance, employees’ salaries, purchase of services, consumption costs, etc.
Definition of Capex
CAPEX, also known as Capital Expenditures, is the sum of costs used to purchase real estate, technology, machinery and equipment. The goal of CAPEX is to meet needs with a view to higher productivity and thus higher earnings. This type of investment should provide a long-term return.
Therefore, for the lifetime value of CAPEX, it is necessary that the profit covers the entire investment within a specified period of time. For this purpose, it is important to perform a return on investment calculation. Capex costs vary from industry to industry, in the tech industry these include investments in new software solutions, relevant network infrastructure, IoT devices, end devices, etc.
Definition of Opex
OPEX, or operating expenses, is the sum of a company’s operating costs. In contrast to CAPEX, OPEX represents all costs that are not related to the purchase of goods. For example, paying employees’ salaries, outsourcing services, or maintaining and repairing equipment. The central point of OPEX, since it is a continuous expense, is to reduce its cost as much as possible and maximize the productivity of the company. This reduction in, for example, monthly expenses can have a direct impact on profits. To do this, it is necessary to analyze whether all operational expenses are effectively performing their function for productivity.
For tech startups in particular, OPEX expenses have a major advantage, as they reduce seed capital, such as for technical equipment, software or network infrastructure. Instead, subscription services such as cloud infrastructures, a cloud solution, Equipment as a Service or Product as a Service can be used.
What are the advantages of Capex to Opex
Thus, for companies, the main difference between Capex and Opex is the method of payment and taxation. Basically, a Capex expense is an asset that is paid upfront and once. Opex expenses, on the other hand, are paid monthly, quarterly or annually. A very common mistake in calculating the difference between CAPEX and OPEX is to multiply the monthly value of the service provided and compare it to the one-time purchase value of a piece of equipment (or similar). Hidden or indirect costs that make a significant difference in operations are not considered in this calculation.
Here is an example from the IT sector: the average depreciation period for equipment is between 3 and 5 years. In addition, there is the cost of renewing various types of licenses for the systems. If we only look at the CAPEX, the equipment is quickly purchased. However, what is often forgotten is the operation, maintenance on premise and monitoring, which count as OPEX and are therefore added. In the subscription business, these indirect follow-up costs are calculated in.
Especially in the Internet of Things and the so-called “as a service” models, a paradigm shift is therefore taking place in many companies. And we’re not just talking about tech startups. In fact, all companies that also use equipment can make the shift to an OPEX view (as in the equipment as a service business model, for example). For example, the young restaurateur can forego the expensive purchase of a professional espresso machine and instead choose an “espresso as a service” provider to provide the service of “espresso preparation.”
Trend towards “as a service”
Companies in a wide range of industries are showing a tendency to move gradually from CAPEX-to-OPEX. OPEX models, or let’s call them “as a service” models, offer continuous updating and enable the regular purchase or subscription of new products and equipment. The growing number of companies offering specialized technology services is fueling this shift.
The shift from Capex to Opex avoids high capital expenditures to purchase new equipment to replace the previous (outdated or overhaul) equipment. It also avoids the need for training the entire team each time a change is made. Moving from a one-time sales model (CAPEX) to a recurring subscription sales model (OPEX) based on usage and data (data-to-cash) becomes the new spending model – even for traditional companies.
Flexible calculation with Opex
Greater flexibility and better calculability is another advantage of Opex spending. There is no need to invest a large sum without knowing the business development in the coming years. Companies can start small and make adjustments such as upgrades / downgrades of subscribed services or services as needed and the economic situation changes.
In addition, further technical developments, new software versions, and the like are often included in subscriptions. Access and effort has also become easier, as provisioning can often be easily booked via a website or app. SLAs (Service Level Agreements) also ensure the security and availability of the respective infrastructure for customers and management.
Conclusion: The shift from “Capex to Opex” opens up new business models
However, the advantages of the shift from Capex to Opex lie not only in the economic and balance sheet benefits, but the “as a service” models also offer access to technologies that would otherwise not have been accessible due to the high initial investment, especially for SMEs, that want more digitization.
As an example, consider the Internet of Things (IoT). IoT products and projects usually go hand in hand with investments in hardware (e.g., gateways and sensors), software and other associated services (e.g., for analyzing data obtained from machines – keyword: predictive maintenance). For many companies, however, this is only possible if the change from a one- time high investment (capex) to a continuous smaller and more plannable expenditure (Opex) is used.
Especially in the area of Internet of Things, the trend toward as a service models goes hand in hand with another change for the manufacturers of products and machines. When using IoT technologies, manufacturers can monitor and also control their products much better. With this approach, the entire business model can change from a one-time sale of a product to a service model, as the previous products can now be offered as a service or pay-per-use.