DEC 21, 2021
With changes in industry, modernized technology, and the reality of having to meet ever-increasing needs, agencies and organizations have the challenge of how to make operations and budgets more efficient. Our country is experiencing an increase in opportunities to modernize technology and infrastructure. Agencies are exploring the concept of Software as a Service (SaaS), or a subscription-based model, to access new systems over the Internet, as opposed to complex software and hardware management.
Due to new opportunities, such as The American Rescue Plan and the Infrastructure Investment and Jobs Act, local governments are in the stage of planning budgets and creating processes to allocate new funding. Understanding the benefits and drawbacks of Capital Expenditures (CapEx) and Operational Expenses (OpEx) gives agencies and organizations a strategic advantage to secure their share.
The key elements to consider are:
Capital Expenditures (CapEx) are the funds a company spends to acquire fixed assets. This includes physical property or upgrades to technology or equipment. CapEx is considered a large investment, usually to undertake a new project or improvement on existing property or equipment. These purchases are made in full and upfront, rather than a leasing or “pay-as-you-go” model.
Operating Expenses (OpEx) refers to the funds used for shorter-term purchases. These are expenses that are qualified as ongoing business operational costs. OpEx purchases are typically items that an organization would use within the same year of purchase.
It is important to note the difference in the usage of “expenditure” as opposed to the word “expense.” A key distinguishing factor between CapEx and OpEx is that operating expenses are predictable and recurring. Capital expenditures are less frequent and regular. These are long-term purchases.
One of the primary benefits of CapEx is that once you make the purchase, you own the item outright. In the case of purchasing new hardware, owning the equipment gives you full control over its and total disposition. However, with full ownership comes full responsibility. Hardware ages, breaks down, and requires upgrades and repairs, proving to be a less cost-effective solution.
Moreover, because CapEx purchases are larger expenses and fit into the company’s overall budget, spending goes through a more rigorous approval process. This can be helpful to ensure that future projections and trends have been considered — and that it has been determined that such an expense will improve operational efficiency.
Conversely, this rigorous approval process can have an adverse effect on productivity. Approval for public safety and public administration agencies may require review from committees and even local government, resulting in years of delayed projects.
Technology is ever-changing. Agencies must stay up to date to meet organizational and community needs. The benefit is that OpEx allows scalability. This service model provides the freedom to modify software and technology as demands change over time. Embracing operational expenses can result in a more cost-effective and flexible solution.
SaaS is one way to eliminate costly maintenance and repair fees that come with owning hardware and equipment. Software that can be purchased as an operating expense often already includes these fees in the cost of service.
As it relates to the approval of budgets, purchasing a new system as an operating expense can reduce time and the number of stakeholders needed for approval. Utilizing systems that operate on a “pay-as-you-go” basis or monthly model can streamline operations and productivity. Additionally, this model allows you to test a product and its ability to fit your needs; and to switch to a new product that better suits your goals.
The risk of taking a CapEx approach to spending is the uncertainty that your purchase today will meet tomorrow’s needs. As technology develops, so must our operations. Cloud-based technology is not a thing of the future – it is a present solution for today’s challenges.
Many organizations are adopting cloud-based technologies to eliminate slow manual processes and enable staff to be connected whenever and wherever. Choosing to invest in technology from an OpEx standpoint, combined with the investment in cloud-based solutions, helps keep financial forecasts stable and predictable. This is a key benefit of shifting to SaaS providers. These options eliminate the need for manual installs, and require small monthly subscriptions, allowing users to pay only for services they use.
As opportunities to modernize systems grow, consider how long will this system meet your organizational needs? CapEx purchases require well-thought-out forecasting. Yes, there is a great benefit to outright owning your hardware and equipment, but the rigidity of large investments can lock you into a purchase that no longer works.
There is no one-size-fits-all model. Organizations have concerns about both CapEx and OpEx spending. However, the OpEx approach proves to be an effective method for predictability and saving time and money and a better fit for those on a path to modernization.
Your agency needs a flexible solution – one that increases customer satisfaction and productivity, and that connects you to community members who need your help most.
Explore your options by connecting with a member of the CentralSquare team to discuss whether a CapEx or OpEx model is right for your agency or organization.