CapEx vs OpEx in IT spending: How SMEs can get the balance right

Budgeting and financial management are vital for a resilient business that can seize new opportunities. Central to this is balancing CapEx vs OpEx spending. For finance and IT teams, this includes creating IT budgets that consider IT lifecycles and hardware procurement.

The software industry has shifted towards subscription-based models, and OpEx takes a growing proportion of essential IT services. As a result, balancing CapEx vs OpEx in IT spending is now more complex than it once was. Getting this right means aligning your IT strategy with financial planning, underpinned by a clear understanding of what this means for your business’s unique needs, operating environment, and long-term resilience plans.

We’ll look at how these factors impact some common IT projects, but first, we’ll explore the key differences between CapEx and OpEx spending and their pros and cons.

Table of contents

1. The difference between CapEx and OpEx for SMEs
2. The pros and cons of CapEx in IT spending
3. The pros and cons of OpEx in IT spending
4. CapEx vs OpEx in common IT projects
5. Should your IT project be CapEx or OpEx? Here’s how to get your strategy right

The difference between CapEx and OpEx for SMEs

What is CapEx?

CapEx (Capital expenditure) is spending on physical and intangible assets. It’s a medium to long-term investment in infrastructure such as computer hardware, servers or custom-developed software. It’s funded by owners’ capital, venture capital, bank loans, or another financial arrangement such as hire purchase or finance leasing.

What is OpEx?

OpEx (Operating expenditure) is the ongoing cost of running a business, funded by revenue generated from day-to-day operations. These expenses include wages, insurance, utility bills, software licenses, and web hosting. They are short-term costs, benefiting the organisation for less than a year.

Previously, there was a clearer delineation between CapEx and OpEx. Finding the right CapEx strategy was the cornerstone of increased productivity and long-term business growth, whereas OpEx was often seen as an overhead.

Today, almost all businesses rely on technology, making investment in IT vital for competitiveness and growth. For most organisations, this means growing use of cloud services, Software, and AI, which are delivered as-a-service, paid for by subscription. In other words, it’s an investment in the company’s future, but an operational, not a capital expense.

This blurring of the lines makes it even more important for SMEs to assess OpEx vs CapEx for each project.

The pros and cons of CapEx in IT spending

Capital expenditure has several benefits:

1. Greater security: On-premises data storage can help organisations in highly regulated sectors, financial services, for example, meet statutory data security requirements.
2. More control over IT infrastructure: A key consideration for businesses with customised workflows, legacy systems, or systems of record that are difficult to migrate to the cloud.
3. Financial certainty upfront: When you agree on loan or leasing terms, your costs are fixed or known going forward.
4. Tax efficient: Depreciation of assets such as hardware and IT equipment adds to business costs but should also reduce your taxable profits.

However, there are also drawbacks:

1. Risk of over- or under-provision: Businesses risk wasting money on unused capacity or having insufficient capacity to scale.
2. Obsolescence risk: Tied to older technologies, businesses may become less agile.
3. Cash is tied up: With less liquidity, cash can’t be quickly redirected to meet unexpected costs or seize new opportunities.

The pros and cons of OpEx in IT spending

More than 60% of organisations began accelerating the shift in IT spending from CapEx to OpEx during the pandemic. Here’s why that trend looks set to continue:

1. Greater agility: As the boom in AI tools and services demonstrates, new technologies can emerge suddenly. OpEx helps protect SMEs’ cash flow, enabling them to direct resources to new technologies.
2. Flexibility and scalability: Cloud gives businesses more flexibility to scale up or down if their needs change rapidly.
3. Faster deployment: As-a-service solutions can go live quickly, whereas custom software or infrastructure can take weeks or even months to roll out.
4. Automatic upgrades and security patching: These are usually integral to SaaS contracts.
5. Easier budgeting: Predictable monthly payment charges make planning easier.

There are also a few potential OpEx downsides to consider:

1. Higher long-term expense: Subscription payments are easier to budget, but costs are usually higher over time.
2. Vendor lock-in: Switching providers is often complicated and expensive.
3. Reduced control: Organisations may not have the option to delay upgrades. The software is hosted online, so there may be less flexibility to customise the environment than with custom software.

CapEx vs OpEx in common IT projects

When you're deciding on your CapEx vs OpEx strategy, getting the right balance depends on your forecasted growth, efficiency and future goals, the environment your business operates in, and your long-term IT resilience. Let’s break down how these factors translate across two common IT projects.

Example 1 - Data storage: Considerations for on-premises vs cloud

Growth, efficiency and future goals

Businesses in a period of rapid expansion or trialling AI projects need increased data storage, but the exact amount is difficult to predict. In these instances, where flexibility and scalability are essential, OpEx cloud spending is usually the preferred option.

However, on-premises storage may be a better choice for some. When businesses have access to investment funding or venture capital and can buy equipment outright, long-term costs could be lower, especially when capital must be spent within a fixed timeframe.

Operational constraints

On-site data storage can be a practical decision for those with the space, in remote areas, and where internet access is intermittent.

Businesses operating in regulated industries may value the additional security and confidentiality of on-premises solutions. For these organisations, it’s not usually an either/or question, but how to balance a hybrid cloud and on-premises approach.

Long-term resilience and IT strategy

Across all sectors and business types, improved security is a common IT strategy. For this reason, IT leaders may want to keep core business data on-premises.

Egress fees, moving data out of a cloud provider, are a common hidden cloud storage expense. The high costs of transferring data from one provider to another make it difficult to shop around for the best deals or for suppliers that are more compatible with your current IT strategy.

Example 2 - IT equipment and hardware: Considerations for buying vs device-as-a-service

Growth, efficiency and future goals

Device-as-a-Service (DaaS) models spread the cost of high-ticket items, helping to protect cash flow. As IT equipment depreciates rapidly, businesses can avoid being left with assets that have little residual value.

However, long-term costs are often higher than buying the equipment outright. HMRC encourages investment in equipment, including hardware, through capital allowances, making CapEx a worthwhile consideration for some.

Business environment and technology constraints

While DaaS works for most businesses, some need more control. Organisations that rely on specialist equipment, non-standard devices, such as Linux-based laptops, or that operate in specialist environments may need to buy their own hardware.

Long-term resilience and IT strategy

At Texaport, we recommend replacing hardware every three years to maintain performance and security. DaaS supports this approach, offering effective lifecycle management with devices regularly upgraded by the provider.

However, IT teams may need greater control over infrastructure if they rely on custom integrations, for example. In these cases, ownership may be a better choice.

Should your IT project be CapEx or OpEx? Here’s how to get your strategy right

IT strategy must support overall business goals, such as ensuring business continuity. That’s why at Texaport, we often work with IT leaders alongside the entire management team.

There are no hard and fast rules when choosing how to balance CapEx vs OpEx spending, but when you work with a strategic IT provider like Texaport, you’ll be systematically guided through the decision-making process. Factors to consider include:

• Alignment with long-term business goals: assessing whether the capital could be better directed elsewhere.
• Implications for core IT priorities: including improved data security, resilience, and regulatory compliance.
• Cost comparison over time: comparing the cost implications over two, three, or five years, for example.
• Future workload predictability: assessing the degree of flexibility and scalability needed.
• Internal resource capability: evaluating whether the business can support an in-house project.
• Business risk exposure: including the risk of obsolescence that can result from CapEx spending.
• Level of control needed: particularly where customised IT environments or integrations are required.

Cash flow pressures may prompt SMEs to allocate more of their IT budget to OpEx and as-a-service solutions, but it’s not always the best choice. To decide on the right IT spending strategy, you must first look at how it fits with your organisation’s overall business goals and finance strategy.

At Texaport, we collaborate across the leadership team so your IT spending strategy can support these objectives. Contact us to discover how we can help you make the tough decision-making process smoother and easier.