CapEx vs OpEx: Which One to Reduce to Meet Budgetary Limits

Budgetary cuts are never easy, but they are part of the reality of running a business. Many IT businesses follow the operational expenses (OpEx) model, relying on the cloud and managed IT services. 

For such businesses, budget cuts are relatively straightforward. However, things are complex for enterprises with significant capital expenditure (CapEx). 

OpEx and CapEx are essential in their own right, but enterprises may need to decide where to use the axe when push comes to shove. Simply put, limited resources may push them to compromise on OpEx or CapEx. 

In this article, we will discuss the following:

• How to make such a decision easier.
• Proven strategies to reduce both.
• How PivIT can help.

Not the article you were looking for today? Try these out:

• Why Network Maintenance Is Crucial During Natural Disasters
• How Important Are Ethics When Choosing a Tech Vendor?
• Consider These Solutions as You Navigate the Engineering Talent Gap

IT Budget Goals

Before we discuss CapEx and OpEx, it’s essential to revisit the goals of your IT budget. Those goals will help you make the right choice when you must compromise on spending. 

In a perfect world, you’d have the resources to buy all the software licenses and equipment you need and then some. However, that’s hardly the case, even with companies that secure hefty funding. 

While IT budget objectives may vary significantly depending on the size and niche of the business, in general, here’s what your budgetary goals should encompass:

• Alignment with business objectives: Any technology investments should be aligned with the business goals. Projects and assets that enable business goals should take precedence. 
  
  
• Efficiency: Getting the most out of your resources requires efficiency, which should be a guiding principle for both OpEx and CapEx spending. 
  
  
• Security: Investing in security is essential from a business and compliance perspective. Initiatives to secure the network and data should be prioritized. 
  
  
• Innovation and competitive advantage: Technology vendors put out even better solutions to enable innovation and help you outrank competitors each year. Investing in innovative and progressive solutions can enhance your organization’s capabilities. 
  
  
• Talent acquisition and development: It’s just as important to invest in talent and add the skills to your teams that your organization can benefit from. Similarly, upskilling and reskilling existing IT talent can help increase the expertise onboard. 

CapEx or OpEx, What to Reduce? 

Whether CapEx is more important than OpEx depends on a variety of factors. It depends on your organization’s circumstances and strategic goals. 

Many businesses switched to the OpEx model for IT, moving their systems to the cloud and eliminating the need to invest in equipment. Even if your IT expenditure is predominantly OpEx-based, there’s still some capital expenditure. 

OpEx covers the day-to-day IT operations, which are primarily essential. On the other hand, CapEx is generally associated with long-term goals. 

For companies with access to capital, prioritizing CapEx over OpEx may seem more viable, as they have the means to invest in technologies that will help them in the long run. However, for companies running on a tight budget, CapEx may be an afterthought as they need to prioritize keeping operations running. 

Regarding budget cuts, it’s best to return to your business goals while assessing your current circumstances. Cutting OpEx is typically much more challenging than reducing CapEx because the former relates to essential operations. Nevertheless, there are ways to reduce and optimize both OpEx and CapEx.

If you have big projects that require significant capital, take a step back and assess their impact in the short and long run. If they’re promising enough to deliver a high return on investment, you can look to cutting OpEx instead. 

Enterprises may often be pushed to cut both OpEx and CapEx spending. Whether it’s OpEx or CapEx, it all comes down to value. Whatever produces the most value should be prioritized, leaving the rest up for the chop. 

Strategies to Reduce CapEx 

For most enterprises, IT-related CapEx involves investing in equipment, software, and talent. Here’s how you can effectively reduce CapEx spending:

Delay Refresh Cycles With TPM

One way to delay significant capital expenses is to extend the life of your existing equipment. By delaying the refresh cycle, you can significantly reduce the CapEx budget for the year. 

When the manufacturer no longer supports the equipment, third-party maintenance (TPM) can be used to extend its use. TPM providers will provide support and updates for the equipment for the time being while you work to secure more capital for the eventual refresh. 

Leasing or Renting Equipment

Leasing or renting is another option for getting new hardware without an exorbitant initial investment. For instance, data center as a service (DCaaS) providers allow enterprises to rent data center space for their exclusive use without buying any equipment. 

Leasing or renting equipment for on-site or remote use is much more affordable than buying it. 

Sell Old Equipment

The market for used enterprise network equipment is steadily growing. Any useable equipment that you may no longer need can be turned into CapEx. It helps reduce out-of-pocket costs by providing extra cash to procure new assets. 

On-Demand Talent

Instead of adding more developers, administrators, and engineers on your payroll, you can hire talent on demand with professional service providers. This strategy is suitable for completing short projects where you lack particular expertise on your team. 

For instance, instead of hiring a hardware engineer permanently, you can hire one through a professional service to help you deploy hardware.  

Strategies to Reduce OpEx 

OpEx constitutes a wide range of expenses that are necessary. So, a cautious approach must be taken to reduce this type of IT spending: 

Outsourcing Non-Core Functions

Third-party IT service providers can offer cost-effective services covering non-core enterprise functions. Identify functions not central to your business objectives and assess the cost savings by outsourcing them. IT support, maintenance, and disaster recovery are examples of the processes and functions that one can outsource to third parties. 

Multicloud Approach

While this isn’t always the case, a multicloud approach can be cost-effective. Using multiple cloud providers can save money for large organizations with massive data needs. After all, vendor lock-ins are also very much possible with cloud providers. 

For purely OpEx or hybrid enterprises that rely heavily on the cloud for applications and data storage, the multi-cloud approach provides an opportunity to cut costs using the cheapest provider. 

Energy Efficiency

For enterprises with on-premise infrastructure, energy efficiency is key to reducing OpEx. For instance, data centers consume significant energy for cooling. By reducing waste of energy for cooling servers and equipment beyond the minimum threshold, data centers can reduce energy bills. 

One can divert some of the CapEx spending to investments for energy efficiency, which ultimately balances with reductions in OpEx. 

Renegotiate Contracts

Enterprises often find themselves stuck in years of expensive licensing contracts, making OpEx cuts much more difficult. Negotiating existing contracts to eliminate unnecessary spending can create breathing room in your OpEx budget. 

PivIT to the Rescue

At PivIT, we don’t believe in cutting expenses but optimizing them. Whether you’re looking to extend your imminent refresh cycle or sell legacy servers to raise capital for a new initiative, PivIT’s wide range of services can enable you to cut spending without compromising your business goals. 

PivIT's OneCall can help you maintain legacy equipment beyond the end of service life. PivIT's EXTEND professional services like SmartHands and Asset Management allow you to save money by outsourcing certain functions or projects. And with procurement savings as high as 60%, you can significantly reduce your CapEx.