How Capex vs. Opex affects data centre outsourcing decisions

Cloud services can help reduce capital expenses, but unfriendly cloud contracts may lead to high operating expenses.

In this Capex vs. Opex guide, experts explain how utilising shared infrastructure on the cloud can provide multiple points of cost savings. But cloud’s Opex model isn’t always cheaper.

In the current economic climate, where companies are reluctant to make large capital investments, the operating expenses model of cloud is more attractive for some organisations, experts added.

For instance, “The high cost of in-house data centre construction stems from the fact that the technology it houses requires bespoke facilities,” said Jazz Lal, the UK technical manager of CommScope, a telecommunications company.

Capex vs. Opex

In addition to the servers, network switches, storage and other computing resources, a data centre requires capital-intensive infrastructure to ensure continued operation -- for example, back-up power generators for uninterrupted service even during power failures. It also requires cooling systems to remove excess heat from the equipment in the facility. All this adds up to the total cost of an in-house data centre, Lal added.

The total cost of ownership (TCO) for a data centre infrastructure can be high, not only in terms of the initial Capex, such as the cost to design, build, test and commission it, but also because of the on-going Opex.

As an example, Lal noted that the TCO of a rack in a data centre is approximately $120,000 (£73,000) over the data centre’s lifetime -- around half of this is Capex and other half is Opex. With data centres accounting for 20% to 30% of Opex, many CIOs are looking for ways to shoulder the burden differently.

Some of the Capex vs. Opex debate for data centres is about space too. “Hosting your own infrastructure can require significant capital investment in real estate,” said James Carnie, director of sales at eLINIA, a UK-based managed service provider.  

In major cities like London, where space is at a premium, the costs involved in housing your own infrastructure are very high. But businesses based outside of major urban areas will find that the real estate to host their own infrastructure is relatively inexpensive.

“In areas such as Cardiff [Wales] where there isn’t much pressure on space, the in-house option is more attractive,” Carnie said.

Other factors that determine Capex vs. Opex spending on data centres involve staffing costs.

But moving to the cloud isn’t always cost-efficient. “Some cloud-based service agreements do not save cost,” said Matthew Bain, the head of business consulting at ICM, a West Yorkshire company that provides cloud-based services.

Making data centre decisions based on Capex vs. Opex factors

Bain advises professionals to understand the true value of moving to the cloud. “The important question to ask is: Do we want to save costs and/or improve business effectiveness?” 

Experts warned that in many deals, a poor or flawed understanding of pre-contract requirements can add considerable cost once the contract is signed. “Change prior to signing is negotiable; post the effected contract does come at a cost,” said John Walker from the Information Systems Audit and Control Association’s London Chapter.

Enterprises that opt to outsource data centre services must also prepare for price rises, warned Tim Anker, founder of The Colocation Exchange Ltd., a consultancy for data centre and colocation space services. “In 2006, many businesses were left cash-strapped when data centre providers in the UK hiked prices following an imbalance in demand and supply.”

The advice is simple; look for data centres beyond major cities such as London. “Regional data centres cost a lot less, sometimes by as much as half,” Anker said.

Enterprises requiring high levels of customisation can save by hosting a data centre in-house, but businesses requiring easy scalability will benefit from moving to the cloud. Capex vs. Opex is just one aspect influencing data centre decisions, and professionals must assess their other requirements before choosing whether to host a data centre in-house or move to the cloud.

Additional reading in the section:

Six things 2011 will bring to UK data centres
Outsourcing will continue to grow because it is expensive to maintain an in-house UK data centre or to refurbish an existing, inefficient data centre design, says Eric Boonstra, the managing director of UK service provider EvoSwitch. Find out his other predictions.

Common mistakes to avoid when choosing a colocation data centre
Expert Mike Laverick shares some valuable lessons on moving from one colocation data centre provider to another. Arm yourself with a checklist while shopping for a colocation data centre provider.

The wrong colocation data centre provider: A nightmare tale
In the second part of the same series, Mike Laverick advises on how to avoid “colocation blunders”.

How to save money by saving energy
Whether you choose to move IT to the cloud or keep the data centre in-house, one way to save costs in a data centre is by saving on power and energy. This expert tip on green data centres offers energy-saving guidelines.

The data centre boom: Finding the right site just got serious
How do you know which colocation site is the most appropriate for your data centre needs? This article will guide you in finding the right location for you.

Archana Venkatraman is the site editor for SearchVirtualDataCentre.co.UK. Please contact her at [email protected].