Ask the Experts: CAPEX, OPEX and Cloud Economics

Welcome to Ask the Experts, brought to you by In this video, Intelisys’ SVP Cloud Transformation Andrew Pryfogle discusses cloud economics, and why CAPEX or OPEX-focused customers may have different priorities around cloud, with Evolve IP’s Scott Kinka. Learn more about cloud strategy from the Evolve IP team here:

Andrew: We’ve been chatting about CAPEX versus OPEX and all the economics around cloud. In our next Ask the Experts session, we have back with us–thrilled to have him back–Scott Kinka, CTO of Evolve IP. Scott, welcome again.
Scott: Thrilled to be here.
Andrew: Always great to have you. Let’s chat about this topic of cloud economics. There’s a big shift to this as-a-service economy when it comes to cloud and IT in general. There’s still a lot of discussion and customers’ hem and haw on this topic of CAPEX versus OPEX. Talk about the implications of those. Of CAPEX versus OPEX. What are you hearing from live customers today–CTOs, CFOs–that are trying to figure out this answer?
Scott: I think the real key for us is on understanding the way that the financial decisions are going to be made. I think one of the things that we, in the industry, do ourselves a disservice on when we’re talking about cloud is we always assume that moving to the OPEX models is an advantage. We go, “The list of features, DR and this, the ease of use, and then we’re going to give you a better financial model.” I think in a lot of cases surely that’s an advantage; it clearly is. I think the challenge is really understanding how the business wants to buy.
There’s a little bit of an economics lesson for all of us in this model is to understand what that means. Generally speaking, OPEX is an SG&A-type of line item. It basically says, “I’ve got my revenue minus my costs to goods sold. I get some SG&A line item. I put OPEX in there, the bills I’m paying every month. That’s generating EBITA. Below that I can stick capital.” You have to get in what really drives the business. Are they trying to drive EBITA, but are they trying to drive bottom-line profits? How are they buying? What makes the most sense for their business at that time?
Andrew: Got it. Got it. Really important distinction. Are you finding different types of customers, maybe vertically focused? Are there people that are VC-backed, that are startups? Do they have different priorities? What are some examples?
Scott: Exactly. I think you hit the nail right on the head right at the VC-backed, the startups, anybody who is in a swift-moving industry is generally going to love the idea of CAPEX.
Frankly, in those models, they’re trying to drive an EBITA number. They’re trying to show an operational efficiency. If they’re a business that’s a 20-year-old business that’s been around, they’re operating their business for cash. Look, sometimes there’s some flexibility in CAPEX, too. You really have to understand that or take more staid industries: education, government, scenarios like that. How many times have you run into a business where they say, “It’s December. Let’s get the deal done. I have capital I have to spend.”
It’s really important that our Sales Partners understand in the middle of that process how they’re going to buy. You’d hate to get down to the end of the road where the IT department loves the idea of going to the cloud. We’re all thinking it’s a great idea, that it’s going OPEX, and then they go to the CFO to sign the paperwork and they’re, “We can’t add all that operational expenditure now.” You’d think it would be an advantage and be the opposite. We’re constantly talking to our channel team and our Sales Partners about–
We have a sales methodology that we call FLOAT. The F in there is financial. It’s all the things you have to check off. We really think that our partners should get that financial conversation out right away. “I’m going to show you a monthly number. That number’s not going to mean anything to you. It’s replacing some dollars you were spending, some monthly expenditures that you had. It’s all going to get lumped in together. There’s going to be this number. Let me float it. Let’s see how we feel. Then let’s figure out if we can buy it. Then let’s get into engaging your nerds and our nerds and making sure all the lines and buttons connect. Let’s figure out if we’ve got a financial match before we get that far.”
Andrew: Got it. Love it. That’s great stuff, the economics discussion. Thanks for the lesson I think we all got, a really important lesson there in economics. It’s such a critical part of the conversation. Bottom line, and to wrap this up, a customer that is really heavily CAPEX-focused is going to have a different set of priorities around cloud than somebody that is really heavy OPEX-focused. Fair?
Scott: No question. No question.
Andrew: Good deal. Excellent. Scott, thanks again. Always great to have you, my friend.
Scott: Sure.
Andrew Really, really good stuff. Guys, make sure you do check out Evolve IP’s learning center here on the University. You’ll hear a lot of insights from Scott and his peers, members of our esteemed faculty here at the University. Great stuff. We’re having huge success with them. We’re big fans. You should be, too. Good selling.