CapEX, OpEx, and the ITAM Program

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ITAM Practitioner Responsibility to the Finance Department

IT Asset Management (ITAM) is a far-reaching discipline that stretches its influence and best practices into all corners of an organization including IT, Legal, the CXOs, and Finance. The Finance Department should be as familiar with ITAM as IT. CXOs must be as familiar with ITAM as the Finance Department. The ITAM Program Manager must communicate the benefits of mature IT Asset Management to the point that each department, and preferably each employee in the organization, understands its significance and indispensability. From a practitioner’s perspective, it is especially vital for the CEO and the CFO to comprehend the importance of ITAM because both hard costs and soft costs are required to run it. A strong ITAM program also saves hard and soft costs.

One of the many ways that ITAM influences an organization’s finances is the shift from capital expenditures (CapEx) to operational expenses (OpEx) in an organization’s IT department. Common software and operating systems are starting to migrate from local hardware systems to the more software-oriented Cloud, and practitioners must understand that such a shift can come with confusion and consequences.

Organizations use CapEx funds to purchase and invest in major pieces of hardware, such as servers. CapEx purchases are not limited to the accounting period in which an organization bought them. They extend into future periods as an expenditure on the accountant’s balance sheet. This is an important distinction, because such purchases do not go on the Finance Department’s income statement as expenditure. CapEx funds are used for big purchases, not day-to-day expenses. Tax write-offs are a positive result of using CapEx funds.

Operating expenses (OpEx) are day-to-day costs. An OpEx, unlike CapEx, is used up in the same accounting period. They include payroll, sales commissions, employee benefits and pension contributions, transportation, travel, depreciation, rent, repairs, and taxes. Now there is a new OpEx category that should sound familiar to most if not all ITAM practitioners: the Cloud. Because it is an ongoing subscription license, the Cloud is an operating expense, not a capital expense. It is a big shift in the ITAM industry to go from the confidence of managing local hardware servers to the uncertainty of the Cloud. It is also a big shift from the Finance Department’s perspective.

Tax Period 1 2 3 4
OpEx Costs
CapEx Costs

The Finance Department has always counted IT Assets as capital expenses. For example, the Finance Department would divide the cost of a server over four periods of time instead of one. The organization makes four small payments instead of one large one. From the practitioner’s point of view, it does not matter whether the purchase happens once or over a period of time. It is proof of the final purchase that matters. However, the Finance Department is not as relaxed. The last thing the CFO wants is to make undivided large, one-time operational purchases instead of divided capital purchases. The reason is taxes.

CapEx costs are write-offs. OpEx costs are not.

Typical ITAM Assets are write-offs. Cloud subscriptions are not.

That information by itself is bound to cause any Chief Financial Officer concern. He or she looks at the balance sheet, sees only the increased costs, and notices the absent tax write-offs. This affects the bottom line. It affects the entire business’ budget. Without more explanation, the CFO will deny the request for Cloud services. It is the IT Asset Manager’s responsibility to have a conversation about the pros and cons of OpEx over CapEx.

The IT Asset Manager should enter the conversation armed with math:

A large business with 1,000 employees needs new office suite software for every worker. The IT Asset Manager proposes that the company switch to a bulk Cloud subscription service (software as a service, or SaaS) with a license that covers everyone as opposed to downloading the software one computer at a time. The total cost is $70 multiplied by 1,000 employees, totaling $70,000.

When downloaded software is a CapEx cost, that $70,000 is divided by, for example, four periods. $70,000 divided by four equals $17,500. The CFO is thrilled to pay one-fourth of the cost in that initial pay period instead of $70,000. However, it is $70,000 in that initial period if that office suite is in the Cloud. All the CFO understands at first is that the acquisitions require four times more money than originally budgeted.

This is where the CapEx vs. OpEx conversation has to happen between the IT Asset Management Program Manager and the Chief Financial Officer. From the CFO’s perspective, the organization is not only paying a larger up-front cost, but it also misses out on the CapEx tax write-offs that naturally come with depreciation. However, because the organization will operate the software through the Cloud instead of on the organization’s native hardware, the cost of going through the Cloud is far less. The organization may lose thousands in tax write-offs, but it gains thousands in what it saved in soft costs.

Soft cost savings are not as welcomed by the Finance Department as hard cost savings, but they are savings nonetheless. A CFO will understand that, but only if the IT Asset Manager has the conversation. As long as that conversation contains clear numbers, correct math, and a dose of patience, the CFO will understand why the Cloud is ideal.

References
[1] Capital Expenditures vs. Operating Expenses: What’s the Difference?, J.B. Maverick, 4 Mar. 2019, https://www.investopedia.com/ask/answers/020915/what-difference-between-capex-and-opex.asp
[2] Business Dictionary: Operating Expense, Business Directory Staff, Undated, http://www.businessdictionary.com/definition/operating-expenses.html



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