CAPEX, short for Capital Expenditure, signifies upfront investment in assets with long-term benefits. OPEX (Operational Expenditure) covers ongoing costs of business operations and maintenance.
What's the difference between capex and opex?
CAPEX, or capital expenses, is the money an organization spends for acquiring, upgrading, or expanding fixed assets that yield long-term value. These expenses, like buying property or equipment, depreciate over time. In contrast, OPEX, or operating expenses, refers to recurrent costs related to running a business. These include salaries, utilities, and maintenance.
What does it mean when companies move from CAPEX to OPEX?
Companies across a range of industries are gradually transitioning from CAPEX to OPEX models, often referred to as “as a service” models. See our wiki on everything-as-a-service (XaaS) for more information. These models allow vendors to continually update their offerings. They also provide customers with the flexibility to regularly subscribe or purchase new products and equipment. The rise of specialized technology service providers has exacerbated this shift.
Moving from CAPEX to OPEX helps companies avoid high upfront capital expenditures. While somewhat broad of a statement, as most organizations will have a mixture of CAPEX and OPEX, CAPEX to OPEX is a trend businesses today are considering due to the benefits offered by having a higher operating expenditure than capital expenditure. For example, purchasing new equipment and replacing outdated or obsolete assets is an expenditure in a liability. Transitioning from a CAPEX to an OPEX model shifts the burden of maintenance and upgrades to the provider (i.e. the vendor), not the customer (i.e. the business). Businesses that move from CAPEX to OPEX also tend to adopt a new recurring subscription sales model that’s priced according to customers’ usage data, while benefitting from this trend themselves.
The importance of moving from CAPEX to OPEX
There are several reasons why companies move from CAPEX to OPEX. For example, businesses “as a service” models that rely on OPEX enables access to technologies that may have been inaccessible due to high initial investments. This is especially true for small and medium-sized enterprises (SMEs) seeking greater digitization.
Consider the Internet of Things (IoT). IoT projects often require investments in hardware, software, and associated services for data analysis and predictive maintenance. However, these expenditures are costly for companies operating with a one-time, high-capital investment (CAPEX) model. Therefore, it is more economically viable to adopt an approach that relies on continuous, smaller, and more predictable expenditure (OPEX).
The trend toward “as a service” models also benefits manufacturers of products and machines. IoT technologies enable better monitoring and control of products, facilitating a shift from a one-time product sale to a service-oriented model. Therefore, Industrial IoT products can be offered as services or on a pay-per-use basis.
In summary, transitioning from CAPEX to OPEX increases the ease of access to expensive technologies that can be used to provide customer value. It can also improve financial planning and support new business models. Embracing “as a service” models helps companies adapt to changing market dynamics and unlock new opportunities for growth.