Luca Isola

by | Jan 10, 2020

Capex vs Opex. Should I buy or should I lease?

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The Subscription momentum.

In our daily life, we experience periodic subscriptions model for lots of services, especially those relating to entertainment (e.g., Spotify, Netflix), or to premium services such as Amazon Prime, but the model is also finding a place in a number of other sectors, from long-term car rental, to e-magazines, to consumer goods, to the mobile phone applications market. 
 
Wanna know what’s the reason for this success?
 
Well, subscription pricing has a lot of advantages. For customers, simplicity and flexibility (just a comprehensive single price per users per month), embedded scalability, no need for upfront payments; for sellers, regular recurring sales, the chance to create a customer base and build brand loyalty. No wonder that the B2B market is rapidly moving towards a subscription purchase model, mainly driven by the proliferation of “as a Service” offers, which require a subscription since infrastructure investments are no longer required. In fact, the services are usually connected to the provider’s Cloud and we are witnessing the end of the era of possession and the beginning of the era of use
 
Among the pioneers of this transformation, we can certainly mention Adobe System, which began offering a subscription-only business model in 2012, or Autodesk who announced the transition to a subscription model in 2016.
A couple of years ago (2017) also Cisco started shifting to this model, investing a lot on its Flex plan, which, today, is its first proposition (and probably it will be soon the only one) to purchase the software licenses. Plus, they recently started to offer some collaboration hardware devices with a subscription model (HaaS – Hardware as a Service).
 
Since Imagicle is also able to offer both purchase models, in my business development activity of the Service Providers market, I am increasingly asked, during the offer phase, to compare the option of perpetual licenses (Capex) and subscription licenses (Opex), the two basic expense categories for IT spending.
 
Well, the latter is rapidly becoming their preferred choice, being also the way they resell the features included in our ApplicationSuite.
 
Therefore, beyond the pros & cons for resellers and providers, the subscription model should be the object of the attention of any company that wants to offer the maximum range of possibilities to its customers. So let’s try to understand what this choice depends on and what are the advantages offered by a software subscription compared to perpetual licenses.

Is Opex better than Capex

To understand the issue, let’s start with the definition of Capex and Opex from Wikipedia:
 
CAPEX (CAPital  EXpense) – is the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land.
OPEX (OPerating EXpense) – is an ongoing cost for running a product, business, or system.
 
Looking at these definitions, it’s easy to understand that the first choice criterion is purely financial and depends on the strategic value of the investment made, the nature of the asset purchased, and the impacts on the financial statements and shareholders.
 
In fact, the way in which these costs are accounted for has an impact on EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), for which capital investments may be preferred, but also on taxation and obviously on spending power, whereas an Opex approach can give greater economic and financial advantages.
 
But let’s leave these questions to the CFOs of the companies (who certainly know more than me face with rolling eyes) and focus our attention on the effects that this choice can have from a business perspective to understand the operational benefits of migrating to a purchasing model in Opex.

Cost-cutting.

Now, CapEx has its advantages, of course. 
In general, once the purchase cost has been incurred, there will be no others (apart from the recurring costs coming from maintenance and support services) and, in the long term, what is purchased on capital account will cost less than the rental of the same goods for an equivalent period of time.
 
However, OpEx can be more suitable in many situations. First of all, it’s not necessary to invest in advance a large amount of money, and this can become of fundamental importance when you have a small budget; moreover, the capital saved can be invested to finance long-term initiatives that can translate into higher profits.
 
For example, if you are launching a new UCaaS offering, even if you have sufficient spending capacity with the usual Capex approach, it would take a few months/years before reaching the financial break-even point; by purchasing the required resources with the subscription practice, instead, revenues could immediately cover costs.
 

Flexibility.

The OpEx model also offers flexibility. There is no need to invest large amounts today to make sure you meet requirements that will come out in two years; you can start with a small investment, expand the system when needed (or reduce it once the subscription period is over) or even stop or replace a service if it doesn’t offer what you need. You will never get stuck with the amortization of resources that you no longer use.
 
In a relatively new context such as that of UC as a Service, where the services paid by Customers depend on the effective users adoption and their needs may change over time, having the opportunity to modify and streamline purchasing costs accordingly can definitely become a competitive advantage, especially when launching a new offer on the market.
 

Predictability.

In addition, OpEx expense tends to be more predictable. Since you do not pay to buy an asset but for its use, the supplier must continue to provide a level of product/service performance based on the agreements made. If you buy a tangible asset and it breaks after the warranty expires, you will need to repair or replace it, incurring an unplanned cost. If, on the other hand, a contract is signed for the use of this asset, it’s normally the responsibility of the supplier to ensure the integrity and performance of the product. In many cases, you will not even have to pay for the upgrades: new versions of the product will be provided as part of the agreement, without having to buy a new one.
 
If we consider software applications, by purchasing in Opex mode there will be only one recurring cost, including maintenance, support, and updates, which will be fixed and foreseeable for the entire duration of the contract avoiding unplanned extra costs.
 

Other advantages.

It’s worth mentioning that the transition to the Opex model implies other advantages and optimizations.
For example, the supplier that sells by subscription (regardless the deployment model which can be on-prem, hosted or Cloud based), having to constantly monitor the proper functioning of the product/service and the relative Customer satisfaction, can also suggest optimizations or report in advance problems that could occur in the specific way of using it.
In a software subscription, the licenses installed at the Customer site or at the Service Provider datacenter are always connected and registered with the Vendor that provided them, so that it can also control activations and deactivations according to the contractual terms.
 
This allows providing additional services such as proactive support, aimed at preventing inefficiencies and optimizing architectures and resources of the environment where it is installed.
 
Finally, there is a simpler and faster purchase and activation process, real-time visibility of the distribution of the licenses, and a centralized control for the expiry and renewals of the contracts.

The value of a longer subscription.

Do you agree so far? Well, then I’ll tell you more.
One more thing I’d like to talk about is why a more extended subscription (at least yearly one) is better than a shorter one (i.e., monthly subscription) from the Customer perspective.
 

Purchasing process.

The first advantage is that an annual subscription will not force the customer to go through their internal procurement process every month. This represents a hidden cost that should be taken into account when assessing the duration of the plan to be subscribed, and annual billing solves this problem (at least) for 11 months out of 12.
 

Fixed prices and additional discounts.

Moreover, a longer subscription usually grants additional discounts: costs will certainly not be halved, but some percentage points will be saved.
The most interesting thing, however, is related to the fact that longer initial terms set the price for the entire duration of the contract, protecting against possible price increases (which are approximately 5% per year as industry standard). For example, on a multi-year contractual commitment, each annual automatic renewal will be calculated with the price of the initial subscription, which will become much more competitive over time compared to the ongoing price list. If we combine the benefits of a fixed price with those of better commercial conditions, well, the savings that can be achieved is certainly not negligible.
 

Adoption.

Another advantage of a longer subscription is related to the learning curve of users. B2B SaaS solutions are complex, and they need time to be fully adopted. The risk of a monthly subscription is to drop the solution off because refused by users who don’t want to strive to learn it, forcing the company to evaluate tons of different solutions by wasting time and money.
This is not to say that the product should be onerous for users, and an easy-to-use experience together with users training is crucial in the adoption process, but it’s also true that an annual subscription helps to overcome this initial user friction, provide the time to plan a smooth transition and, in the end, to make the Client’s investment profitable.

Imagicle Smart Plan.

This Spring, Imagicle will launch a new subscription plan to allow its Partners and Customers to benefit from all the aforementioned advantages of an Opex model: the break-even point has been set around 3 years when compared with the Capex model (still available).
 
The new licensing model is based on stackable licenses. Therefore, for each application, it will be possible to purchase the quantity of the necessary users/channels without having to jump between multi-level licenses. Then you’ll be able to add single units to existing licenses or new applications as the needs increase. This model also allows managing a very small number of SKUs (only one for each product) thus simplifying the purchase and offer process.
 
Subscriptions are a combination of products and services that enable customers to use Imagicle solutions for an agreed limited period, so they can include different Care Plan or High Availability licenses in their rate plan.
Moreover, six Tiers covering any size are available to provide the Imagicle solutions with the right price (Volume discount) to every Customer.
The only requirement is an initial term of 2 years but, if you want to leverage the advantages of a longer subscription, together with a fixed price for the whole subscription period, an additional discount (2%) for each year added is granted.
 
If you have the spending capacity to go for a Capex model or a residual budget to be used within a specific deadline, but you would like anyway to take advantage of a subscription model, you can stay in the middle by pre-paying in full the years of the subscription terms and getting better price condition. 
The only prerequisite to benefit from the Imagicle Smart Plan is to connect the ApplicationSuite (installed at the Customer or the Service Provider’s), to the Imagicle Cloud server in order to receive the entitlements of the licenses directly on the Smart Account and manage them through a web portal. 
 
As mentioned above, this offers numerous advantages, including a simpler registration procedure for the licenses and real-time visibility of their status, including the expiry dates of the subscription (or maintenance plan) so that everything is always under control.
 
Being able to acquire data from the Imagicle ApplicationSuite through the Cloud licensing, Imagicle is now ready to offer the new Proactive Support service (included in the Gold and Platinum maintenance plans starting from the Winter’20 release) which provides you with a continuous health-check of your Imagicle App Suite preventing service outage and optimizing the performance of Imagicle applications.
 
This is just the first step of our journey to the Cloud. Very soon we’ll be ready to offer you more than just a connection to a license server, but the opportunity to get all the Imagicle applications “as a Service” directly from our Cloud!
 
Well, I’m sure we have everything in place to start a new chapter of our story together. Let’s go!
 
(Still have doubts? Leave a comment below!)
 
 
#stayimagicle

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