Information Technology Reference
In-Depth Information
One value proposition offered by cloud providers is the opportunity to reduce
the IT capital expenditure and address the issues earlier. Instead, such larger
capital investment is made by the providers themselves who require cloud
computing platforms or private cloud users. In their case, they benefit from
economies of scale through shared service models. Some other implications
of using OpEx are as follows:
• There will be much faster rate of cost reduction using cloud.
• Cost of ownership will be transformed.
• Removal of up-front capital and release funds.
• Shift from balance sheet to operating statement.
• Cash flow implications where revenue generation and expenditure
will be based on service usage.
• There will be a fresh focus on productivity and revenue generation
while keeping capital costs down through greater efficiencies of
working capital.
• Minimizing up-front investment to drive improved asset usage
ratios, average revenue per unit, average margin per user, and cost
of asset recovery.
• Maximizing the use of capital by moving funding toward optimiz-
ing capital investment leverage and risk management of sources of
funding.
When the cost of capital is high, shifting CapEx to OpEx may more easily be
justified. For OpEx to be beneficial is that there should be a reliable mecha-
nism to measure and predict usage and tie this to business performance met-
rics or opt for a monthly or annual baseline fixed rate. A business may still
choose to invest in CapEx for differentiated business processes yet adopt a
usage-based model to improve financial efficiency.
14.1.1 Total Cost of Ownership (TCO)
TCO is an accounting metric that takes all direct and indirect costs of tech-
nology acquisition and operation into account over the IT project life cycle.
The costs include everything from initial investment in hardware and
software acquisition to installation, administration, training, maintenance
and upgrades, service and support, security and disaster recovery, power,
and any other associated costs. The typical cost components are broadly
categorized as acquisition costs versus operational costs, each incurring
administrative and management costs. A simple allocation of these costs is
illustrated in Table 14.1.
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