CAPEX for IT – Why So Painful?

CAPEX dollars reserved for investments in plant, property or equipment (including IT) are notoriously hard to secure. In fact, IT leaders often express dismay at the process involved in not only forecasting for CAPEX needs, but then stepping through arduous internal CAPEX budget approvals. What’s all the fuss with CAPEX, and why is it so difficult to obtain?

Courtesy of Flickr. By  FCAtlantaB13
Courtesy of Flickr. By
FCAtlantaB13

An investment analyst says that 2013 should be a banner year for capital investments. And another analyst, Mark Zandi of Moody’s said in late 2012; “Businesses are flush and highly competitive and this will shine through in a revival of investment spending by this time next year…”

So where’s the CAPEX? Apparently in short supply. A New York Times article says that companies are stock piling cash, and taking on debt, but investing very little in themselves. For now, if there are significant IT investments, it appears OPEX is the preferred route.

First, let’s be clear, the CAPEX vs. OPEX debate really is around a shift in cash flows and outlays, there are little to no other financial advantages.  In choosing one vs. the other, it’s a  matter of company policy, as in one instance (CAPEX) assets are categorized on a balance sheet and depreciated, and in the other (OPEX) purchases are expensed through daily operations.

Certainly, there are capital intensive businesses such as telecom, manufacturers and utilities that must continually invest in infrastructure. These types of companies will always spend significantly on CAPEX. On the other hand, there are companies that are CAPEX restricted such as start-ups, companies under the watchful eye of private equity firms, and medium sized businesses that don’t have much CAPEX as a matter of course. 

Obtaining CAPEX can also be painful for IT leaders. At the TDWI Cloud Summit in December 2012, one stage presenter in charge of IT mentioned that getting an idea from the “back of a napkin to (capitalization budget) approval” could take 18 months.

This is why cloud computing options are attractive. With cloud, companies that either have capital to spend (but don’t want to), or those that are CAPEX constrained can take advantage of existing compute infrastructures on a subscription basis. With cloud, investments in IT capabilities are easier to digest via OPEX rather than front-loading a significant chunk of change in a business asset.  And of course, there are also other reasons to choose cloud computing (such as elastic provisioning and full resource utilization) as listed here.

Regardless, it appears that for the present day, CAPEX dollars (especially for IT) will be in short supply. Perhaps this is just one of the many reasons why there’s a flurry of M&A activity in the cloud computing space?

Questions:

  • Why is CAPEX so hard to come by for information technology?
  • Do you have any horror stories (post anonymously if you’d like) about trying to get CAPEX for IT? Was cloud computing an easier discussion with your CFO?
  • When will larger companies relax their CAPEX spending, or is OPEX for IT a long term trend?
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2 comments

  1. I thoroughly enjoyed your post today.

    Why is CAPEX so hard to come by for information technology?

    The ambiguous term “it depends” applies here. I think the long-term impact of the recession in late 2007 and perhaps chief level officers understanding of the benefits associated with capital expenditures in information technology.

    Do you have any horror stories (post anonymously if you’d like) about trying to get CAPEX for IT?

    The information technology structure where I work is in the process of being upgraded. The approval process lasted several years.

    Was cloud computing an easier discussion with your CFO?

    The CFO is aware of cloud computing. As the company generates more revenue through database-driven marketing and sales he becomes more favorable to information technology infrastructure upgrades.

    When will larger companies relax their CAPEX spending, or is OPEX for IT a long-term trend?

    I think “it depends” applies here as well. There are many unique variables for individual companies. Without any substance or research and based on my own personal experiences, I think that operating expenditures will be a long-term trend. If I come across an article or report that is relevant to this question in the near future I will make sure to share it with you.

    • Jonathan, Several years for an IT refresh approval huh? Why does that not surprise me? Thanks for some real world examples of difficulties in getting CAPEX for IT. Appreciate your expertise!

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