By Daniel Shim
We are heralding a new age of remarkable advancements in consumer technology, enabling individuals to leverage new social, mobile and digital applications to significantly improve the quality of his life and interactions. What is less obvious is the advent of equally compelling advancements in enterprise technology, which are starting to permeate and evolve a wide array of functional areas such as CRM, HR, ERP and many others.
Moreover, modern enterprises are increasingly migrating their legacy applications to cloud-based platforms, paying for utilization and infrastructure as an ongoing operating expense rather than investing sizeable capital for a software license to develop the asset and depreciate its costs over time.
There is no denying that both OpEx and CapEx are cash-based costs that impact the bottom line profitability of businesses. However, CIOs, as well as CFOs and CEOs, have traditionally preferred CapEx for several reasons. According to retail CIO Robert Fort, “Depreciating CapEx over an extended period of time is used as a fallback strategy to smooth out and improve the predictability of the financial reporting of business performance. In that way it’s more akin to procuring something on credit as opposed to cash.”
Mr. Fort also adds that EBITDA (earnings before interest, taxes, depreciation and amortization) is used for bonuses and year-over-year comparisons and, consequently, organizations have come to rely on EBITDA for setting performance baselines. Favoring CapEx has become so routinized and habitual that many organizations have not taken the time to pause and contemplate the significant disadvantages of continuing this outdated practice.
Most notably, using CapEx to procure enterprise technology hinders a company’s ability to move and allocate resources to directly match the needs of rapidly changing market conditions. Capital investments, by their nature, are intended for long-term deployment, and the tendency for many CIOs is to overbuy capacity to avoid purchasing additional assets to planned growth and unforeseen resource needs. According to Mr. Fort, “In hindsight, CIOs often realize that he/she really needed only 60-70% of the purchased capacity but because the CapEx decision was made several years ago, it leads to a masking effect on how much IT overhead the company really needs to operate.”
In comparison, Demandware provides a fresh alternative and a new approach for retailers looking to leverage IT resources much more optimally. With Demandware’s cloud-based model, IT resources are accessed on an as-needed basis, and the costs are directly tied to the actual real-time performance of the business, rather than a long-term projection determined several years ago. In turn, retailers can avoid underutilization of capacity and business leaders are given a very transparent, observable, and quantifiable view of the true IT expenses required to run their enterprise. An accurate measure of a company’s IT overhead can enable managers to ask the right questions and factor in the appropriate metrics to determine the actual Return on Investment (ROI) that they are attaining with the adoption of an enterprise platform.
A question one might naturally ask: Why can’t experienced and well-informed CIOs refine their CapEx estimates to be more in line with their actual needs to minimize the overbuying? This question hints at another significant disadvantage of the CapEx model. As it turns out, the decision to procure IT infrastructure is a much more complicated process that goes beyond pure economics. “CIOs really want to avoid procuring additional IT infrastructure beyond what he/she initially projected,” according to Mr. Fort. “It’s not only because the CIO is wary of increasing the budget and disrupting the long-term financial plans that the CFO and CEO have initially agreed to. Another huge factor is time. How fast can my staff install the hardware and infrastructure to fulfill my computing requirements? How quickly can I procure and contract the software licenses? How long will it take to implement, test, and launch?” The substantial amount of time required to put into practice incremental IT infrastructure in order to meet ever changing business demands is a key consideration in the CIO’s capital budgeting process.
In contrast, companies adopting Demandware’s cloud based model are well positioned to relinquish the time-consuming and inefficient procurement practices associated with CapEx. Using OpEx provides the advantage of deploying IT resources to quickly capture fleeting opportunities in a retail environment where market fluctuations are substantial and product acceptance is becoming increasingly unpredictable. The end result of the flexibility and scalability of a cloud-based infrastructure are organizations that are better equipped to move quickly and maximize revenue for each dollar of IT spend. Not surprisingly, the number of business owners embracing cloud-based IT applications continues to grow and many are realizing that the typical 3 to 5-year deployment horizon of a capital investment is too long and risky in an era where the rapid pace of technical innovation is making today’s IT capabilities irrelevant tomorrow.