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Migrating to the cloud? Beware prickly financial situations

 

Migrating to the cloud? Beware prickly financial situations

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By Jim McGittigan, Gartner | Mar 20, 2012

The public cloud is, by nature, a service, and does not generally require capital purchases. And the opex vs. capex discussion related to public cloud vs. on-premises is not new. 
 
What is new are some of the unexpected roadblocks to cloud adoption that are financially related. Since the annual cost of a cloud-based environment is often the equivalent of or less than the annual operating costs of a similar on-premises environment, it is essential that financial roadblocks are addressed in order to ensure the best decision for the enterprise is made.
 
For 2011, the worldwide market forecast for public cloud is estimated at US$89 billion, with a five-year compound annual growth rate of 19%. Compared to the forecast for all IT marketplaces in 2011 of US$2.6 trillion, cloud represents only 3.5% of the IT marketplace. Cloud services are forecast to account for 5.9% in 2015.
 
Opex vs. Capex
Looking at Figure 1 below, the cross-industry trend from the Gartner IT Key Metrics Data shows opex rising from 71% of total IT spending in 2007 to 74% in 2011. This trend is partially due to increased usage of cloud services.
 
Click image to enlarge
However, a majority of the increase is due to a number of other factors, including a clampdown on capital spending due to the economic downturn, changes in enterprise policies related to capitalization thresholds and more effective usage of operating leases.
 
While we expect the percentage of opex to continue to rise due to the continued adoption of cloud services, it is difficult to project the impact of the increased opex and reduced capex spending due to cloud computing.
 
There are a number of other variables that could potentially offset some of the increases in the opex percentage, including the potential release of some of the cash that has accumulated over the past several years to purchase direly needed IT assets or the threat of recent U.S. accounting regulation changes to end off-balance-sheet operating leases.
 
Assuming all of the projected increase in cloud spending by 2015 represented a dollar-to-dollar shift from capex to opex, the opex percentage would still only rise from 74% to 76% by 2015 (assuming no other changes).
 
This represents less than two-thirds of the increase that has occurred in the opex percentage during the past four years.
 
Therefore, concerns about a material shift in the mix of IT opex vs. capex are unwarranted. The opex/capex mix of IT spending should not be an inhibitor to the adoption of cloud-based services.
 
 
 
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