When building the business case for cloud, one of the most compelling arguments to senior leadership (read: C-suite) is the ability to shift IT spending from Capital Expenditures (CapEx) to Operational Expenditures (OpEx). A capital expense is defined as money spent by a business on acquiring or maintaining fixed assets, such as land, buildings, and equipment. An operating expense is defined as the ongoing cost for running a business/system or providing a service/product.

There are several advantages that make up a compelling business case for leaders to transition to an OpEx model, which are enumerated as follows:

• Lower, recurring costs versus large, upfront investments: As mentioned earlier in this chapter, building out a data center requires large amounts of time and resources to bring the compute power online. The cost associated with the time and resource allocation to building a data center is large. In an OpEx model, the business can achieve the same end result without a large, upfront investment.
• Tax benefits: Operating expenses are treated differently than capital expenses. In general, business are allowed to write off operating expenses the year they are incurred—or said another way, these outlays can be deducted in their entirety from a business's taxable revenue. However, in general, capital expenses must be deducted more slowly over a schedule defined by the government tax office (for example, IRS in the US). These schedules typically range from 3-5 years, over which the cost of the capital expense can be deducted from a business's tax outlay.
• Greater transparency: The cloud enables a great degree of cost transparency, which allows business leaders to justify and draw conclusions from investment decisions. With a native cloud environment, conclusive market tests can be conducted to increase or decrease IT spending (for example, we paid X dollars for Y amount of storage and compute time, leading to a Z% increase in online revenue).

• Capital depreciation: Similar to the tax benefits noted previously, businesses can avoid capital depreciation on their upfront expenses by adopting a cloud-based OpEx model. Capital depreciation is the gradual decrease in value of an asset owned by a company. In the IT industry, this is unavoidable as there are always better performing servers, storage devices, and network components coming to market, driving down the value of older equipment.
• Easier growth: Tied to the natural elasticity of cloud resources, OpEx models allow for spending that matches natural business growth and contractions, whereas fixed capital investments can lie idle or provide a ceiling to business capacity.
• No commitment or lock-in: A concern that business leaders have when purchasing any technology service or product is lock-in—an arrangement according to which a company is obliged to deal only with a specific product or service. This lock-in can be in the form of an exclusive service contract or technology portability limitations (where the barrier to changing systems to work with another product is too costly). This is largely eliminated by cloud as there is no upfront payment or term-based contract necessary to consume cloud services (that being said, term-based discount contracts are available from CSPs. If you are willing to commit to a minimum amount of spend on the platform, CSPs will give incremental discounts over the life of the contract (typically 3-5 years). However, this is in no way mandatory). Companies can choose to increase or decrease their consumption on the platform (or eliminate it altogether) without any limitations.