Information technology budgets involve significant expenditures, but there is more than one way to pay the bills. Identifying when it is advantageous to use capital funds versus operational funds can help districts build efficient and sustainable budgets to support their technology footprint.

What is the difference between a capital expense and an operational expense? 

In most cases, a capital expense is a one-time large purchase expenditure. For example, purchasing fixed physical assets such as buildings, busses, servers, and large quantities of computers may be considered capital expenses. Depending on an organization’s financial rules, a purchase may have to exceed a certain dollar value to be considered a capital expense. By comparison, operational expenses are day-to-day recurring expenses with bills that come in monthly, quarterly, etc. They are predictable expenses that are predicated on a pay-as-you-go model.  

CapEx Pros & Cons

Purchasing IT assets through capital expenditures is the traditional method of building and maintaining technology infrastructure. Many IT budget models pre-date the advent of leasing and cloud computing and were implemented when computer equipment costs were extremely high. At that time, the outright purchase of expensive computing equipment could only be accomplished with capital expenditure.

There are still benefits to using capital expenditures for some purchases. Grants and voter-funded technology initiatives such as bonds or levies may have specific rules that require equipment be purchased and not leased. In these situations, CapEx is the only purchase option available. Capital projects are ideal for facilities work and can create an entrance point for technology implementations at a new site. However, in order to maximize the equipment’s useful life, technology purchases should be carefully planned to ensure delivery exactly when needed. Once the equipment is purchased, it is the organization’s to own and operate. In case of a subsequent funding shortfall, the equipment is still available for use. 

Highline Public Schools traditionally use CapEx funding to purchase technology due to the manner in which the school district works with the community. The district has passed multiple construction bonds to build or replace 17 schools, with innovative technologies being incorporated into the new spaces. In recent years Highline restructured its bond sales to cover technology use within the first five years of a new building’s occupancy. By leveraging bond dollars, Highline has increased instructional capacity through classroom technology use. While this model has been successful, it has forced the district to pay for technology purchases over longer periods of time. As a result, the district has not had a consistent hardware replacement cycle, since technology funding has been tied to construction.

The downside of CapEx technology purchases is that budgets and strategic technology planning can get caught in a “feast or famine” scenario, where equipment is purchased only when funding is available. As a result, organizations may be stuck with aging and outdated equipment if replacement cycle funding is not available. In addition, districts making CapEx technology purchases have to plan for a hardware lifecycle of five to six years. As a result, districts will commonly “over-buy” equipment to make sure organizational needs will be met during the hardware’s functional lifetime. This can lead to deferred maintenance and technology deficits down the road.

OpEx Pros & Cons

OpEx expenditures are becoming increasingly popular for the purchase of technology equipment and services. First, OpEx expenditures allow organizations to procure equipment and services on an as-needed basis through leasing, cloud computing, and/or managed services. For example, districts can rent or lease only the storage or services they need at a given moment and pay for more as demand increases, rather than purchasing expensive hardware upfront with double or triple the necessary storage or processing power.

Second, leasing equipment and/or leveraging cloud computing services allows districts to take advantage of up-to-date technologies. During the life of a lease or cloud computing agreement, organizations can upgrade equipment, add services, and expand or contract utilization based on organizational needs. These changes can be implemented quickly and more efficiently than in a CapEx environment, where upgrades can take a purchasing cycle and several years to implement. 

Third, transitioning to OpEx can support more stable and consistent technology budgeting. Organizations that shift much of their IT budget to OpEx can better predict and manage expenditures across all areas, including equipment utilization and replacement. Buying equipment outright requires staff to predict when equipment will reach end-of-life, request additional funding to replace equipment, and delay hardware replacement if funding is unavailable.

Pursuing the OpEx Opportunity

Transitioning from CapEx to OpEx expenditures requires an organizational shift in budgeting, processes, and mindset. As with any operational change, the key question to answer is “why make the change?”  By analyzing current capital expenditures and comparing them to the costs of leasing equipment or using cloud services, districts can identify money-saving opportunities and make better-informed decisions.