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CapEx into OpEx: The Key to Cost-Effective Infrastructure

By May 17, 2022Blog, Business Processes, Technology4 min read
  • The pandemic has caused many businesses to reassess how they allocate their resources, especially with regards to IT
  • Thanks to breakthroughs in cloud computing and storage, companies now have the choice to pivot their software investments from CapEx to OpEx (SaaS)
  • As labor shortages, supply chain constraints, and inflation continue to persist, organizations are likely to favor SaaS solutions for their flexibility and affordability

The past several years have been a rollercoaster ride for the rental industry. After peaking in 2019, the COVID-19 pandemic caused a massive contraction in demand in early 2020 before experiencing record growth in the following two years. And now, the American Rental Association anticipates that the rental industry will experience record revenues in 2022.

Every industry has learned powerful lessons on how quickly fortunes can change over the past years. Chief among the lessons learned is the importance of flexibility. Many companies have to downsize operations before scaling up or moving much of their workforce to remote work.

Much of this comes down to a simple distinction: capital expenditure (CapEx) versus operational expenditure (OpEx).

The challenges of CapEx

Both CapEx and OpEx refer to how a company spends money – how they differ based on the scale and time horizon of a spend in question.

  • CapEx refers to large and usually one-time expenditures in plant, property, equipment, or infrastructure, using the product of the investment over a long period. For example, buying a building outright for use as an office counts as CapEx.
  • OpEx, by contrast, refers to recurrent and smaller and regular expenditures on goods and services, with the goods and services in question being available for a limited use period. For example, renting a building for use as an office counts as OpEx.

Many businesses have relied on CapEx to finance the infrastructure that drives their operations and revenue. But in the case of a rapid reversal, change in market conditions, or a need to make a big transition, the up-front cost of CapEx can be prohibitive for many organizations – often requiring loans and debt to finance.

CapEx can also represent a major lock-in and restriction, with teams finding themselves unable to pivot once they’re committed to particular capital investment. Sunk cost mentalities and the difficulty of reselling assets often mean that once CapEx is committed, an organization feels unable to experiment with radical change – even when needed.

To a degree, the rental industry needs to embrace some CapEx to function, as someone needs to ultimately own the equipment that’s rented out, after all. However, when it comes to the logistical back-end of many providers, there are many places where CapEx infrastructure can be replaced through OpEx provisioning.

The ascendance of OpEx

However, in recent years, many businesses have begun to rethink what investments have to be CapEx and what can be an OpEx spend. One of the spearheads in this revolution has come with the ascendency of cloud computing and storage. Amazon, Google, and Microsoft have revolutionized IT by enabling businesses to move away from expensive on-premise storage and computing infrastructure to renting these as a service.

This has given rise to many “as a service” businesses that, in essence, have worked to help businesses replace CapEx spends with OpEx alternatives in the form of subscription-based models for products and services. In a way, this transformation has seen the IT and the software industry manage to replicate the economics and ethos of the rental market in the digital realm.

The operational flexibility afforded by this change in IT infrastructure has been of incredible use to small and large businesses worldwide. It has powered radical and rapid transformations such as the global switch to remote working in early 2020 and also allowed businesses to tailor their IT spending to economic conditions.

OpEx for the rental industry

Despite the rental market being by definition a provider of OpEx products and services, much of the rental industry has yet to embrace OpEx in terms of how it builds its infrastructure. This is an Achilles heel for the sector, given that economic conditions are very uncertain right now.

To a degree, the rental industry needs to embrace some CapEx to function, as someone needs to ultimately own the equipment that’s rented out, after all. However, when it comes to the logistical back-end of many providers, there are many places where CapEx infrastructure can be replaced through OpEx provisioning.

One of the most obvious ways, as mentioned above, is embracing the revolution in IT — by choosing the public cloud for storage and computing requirements rather than investing in on-premise data centers. This allows businesses to quickly and affordably scale their IT backbone based on demand and business requirements by treating them as OpEx, rather than being locked into a particular infrastructure bought via CapEx.

Amid times of labor shortages, inflationary pressures, and strained supply chains, the flexibility and affordability of OpEx commitments are a must for the rental industry. OpEx allows rental industry players to quickly scale their ability to serve their customers whenever these are contractions or booms in demand.

By turning capital expenditure into operational expenditure, the rental industry can look to be more cost-effective and resilient than ever before. When it comes time to allocate budget at your company, the time is now to pivot from CapEx to OpEx.

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