Many factors make migrating to the cloud a compelling option for financial institutions. The allure of reduced ownership costs, simplification of IT management, and built-in ability to stay up to date with software releases create a strong pull toward the cloud. There is, however, a commonly misunderstood aspect to the financial impact of migrating to cloud services from in-house solutions. This prevents IT personnel and executive management from having the same understanding about the impact of the decision to move applications to cloud services.
Migrating to the cloud commonly requires an organization to move from a capital expenditure (CAPEX) to an operating expenditure (OPEX) financial model. The difference in long term costs can be difficult to measure as many of the internal costs of managing an IT network are not documented. Here are a few things to consider when evaluating these two options for your financial institution.
CAPEX vs OPEX
Most banks have a pretty good handle on their IT capital expenditures. The upfront, fixed costs, such as hardware and software, and the resulting amortized or depreciated costs over the life of the asset, are historically well tracked. Traditionally, an on premise data center is considered a capital expenditure since it includes the purchase of servers, computers and networking hardware, as well as software licenses, maintenance and upgrades. What is not generally well documented are the internal costs involved with running the system, including the power, floor space, storage and the time IT operations teams devote to the daily management and continual updating of these systems. In addition, the equipment and software will also need to be replaced and updated periodically, making for on-going large capital costs in years to come.
The move to cloud means a move from a CAPEX financial model to an operating expenditure model, in which large capital outlays are replaced by monthly, quarterly, or annual fees an institution pays to operate the business. These periodic OPEX fees include license fees for software access, as well as all of the infrastructure and maintenance costs associated with the technical environment. An application hosted in the cloud via a software as a service (SaaS) model, does not require any major capital investments for the institution. These costs are absorbed by the provider and included within their fees. While the monthly fee in the OPEX model may be higher than the internal amortized hardware and software cost, it eliminates the responsibility and indirect cost of bank personnel having to maintain the IT infrastructure, and enables the bank to be up to date with the latest technology to generate the greatest profits and ROI. In the OPEX model, the IT staff is able to focus on more strategic revenue generating and customer facing activities that benefit the bank.
Making the Case for Cloud
The evaluation of CAPEX and OPEX expenditures is not an apples to apples comparison. It is important for IT personnel to understand the differences between the CAPEX and OPEX models, perform an analysis and be able to effectively communicate the pros and cons before presenting a proposal to the CFO. Each bank must evaluate what is best for their institution based on its goals and strategies and corporate objectives. Working with an outsourced service provider such as, Safe Systems, can help with the process. Safe Systems helps community financial institutions design and install cloud solutions while also ensuring the systems are compliant and meet examiner expectations.