CAPEX and OPEX Minimization Using Cloud Technology: K.Govinda, Kenneth U. Okereafor, Kodali Rajesh Babu

INTERNATIONAL JOURNAL OF COMPUTER APPLICATION
Available online on http://www.rspublication.com/ijca/ijca_index.htm
ISSUE 2, VOLUME 6 (December 2012)

ISSN: 2250-1797
CAPEX and OPEX Minimization Using Cloud Technology

K.Govinda #1, Kenneth U. Okereafor #2, Kodali Rajesh Babu #3
#1 SCSE, VIT University, Vellore, Tamil Nadu, India
#2 National Institute for Legislative Studies (NILS), National Assembly Abuja, Nigeria,
#3 SCSE, VIT University, Vellore, Tamil Nadu, India

ABSTRACT
Opex and Capex of ITES are falling back globally. India Inc, which has for long been
outsourcing-shy, is looking forward to take an extra leap with new technical themes like
cloud, mobility, scalability, social media and analytics. According to technology researcher
Gartner reports that Indian IT spending is projected to reach $71.5 billion in 2013, growing
7.7% from the $66.4 billion forecasted for 2012. Moving to a pay-as-you-go model means the
cash flow of your business is changing. Sources of revenue and outgoing cash expenditure are
on a usage basis based on a unit such as time, volume, or component. Hence in this paper we
present a model through which Capex and Opex of India Inc is minimized using Pay - as you - go model.
Key words: ITES, payasyougo, CFO, CIO, Agility, Cloud Computing.
Corresponding Author: K. Govinda
INTRODUCTION
The Emergence of Cloud Computing brings many benefits which are shifting the economics of
Information Technology Enabled Service (ITES) [1]. Cloud technology standardizes and pools
IT resources and automate many of the maintenance tasks performed manually today [2][3].
Cloud architecture facilitates elastic consumption and Pay as you go pricing. As
corroborated by Nitin Khanapurkar, Executive Director Advisory Services KPMG in India, the
cloud seeks to replace the CAPEX component of the current IT infrastructure with a 'Pay-as-yougo' or OPEX model [23]. Cloud also allows core IT infrastructure to be brought into large data
centers that take advantage of significant advancements of scale. This can be brought with the
help of Direct Cost Saving, Productivity Improvements and innovation [2]. The link between
business and IT has created unprecedented growth and opportunity across all industries, making
IT a key discussion topic in the boardroom of most companies [16].
Conversion from Capex to Opex is a change in the basis of Capex usage as upfront and ongoing
costs are changed by the Cloud Computing business model. The focus of our proposal is on the
facility to maximize the leverage of that capital to acquire IT and business services as mere
utilities while minimizing the risk to the business in Capex used for initial investment and Opex
[4]. Perhaps the most effective forms of long-term outsourcing tend to focus on risk-sharing and
collaboration [20]. While moving away from investments in long-term assets may be seen as
context of Cloud Computing, this implies a move towards long-term Opex-style service where
QoS and costs are still equally relevant regardless of asset ownership and custody. Cloud
computing offers enterprises and governments the freedom to manage their business, not their IT
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assets. In the theoretical world of cloud computing, businesses would no longer have to make
costly capital and operational investments in building and maintaining their own back-end
technology infrastructure [16]. The common factor is the business performance and SLA
requirements [3][5] in addition to a remarkable degree of sustainability.
A company with a high cost of capital and which would benefit from bringing in their tax shield
is a candidate for shifting Capex to Opex but other aspects of the business context may
contradict that candidacy such as availability of appropriate solutions and security constraints on
using shared services. If Capex to Opex is desired, then the company should be bearing in mind
about the desired Capex and Opex and evaluating outsourcing solutions, including public Cloud
solutions, hybrid Cloud, and Private Cloud solutions [11][12].
Cash flow can be an imperative pointer if Capex to Opex is the heart. Pay-as-you-go can be
viewed as an easier on cash flow than pay-upfront. But in some cases both cash flow
considerations may not necessarily exist in the same business scenario. For example, a business
may want to improve cash flow through moving to a direct usage model but still retain
investment in Capex for differentiated private business processes [13].
MATERIALS AND METHODS
The Investopedia on Capex and Opex says that, the amount of capital expenditures a company
is likely to have depends on the industry it occupies. Some of the most capital intensive
industries include oil, telecom and utilities. In terms of accounting, an expense is considered to
be a capital expenditure when the asset is a newly purchased capital asset or an investment that
improves the useful life of an existing capital asset [4][5]. If an expense is a capital
expenditure, it needs to be capitalized; this requires the company to spread the cost of the
expenditure over the useful life of the asset [6]. If, however, the expense is one that maintains
the asset at its current condition, the cost is deducted fully in the year of the expense [7].
Its no secret that IT and hardware can be one of the biggest CAPEX that businesses shell out for
[17]. Additionally, the payment of employees' wages and funds allocated toward research and
development are operating expenses. In the absence of raising prices or finding new markets or
product channels in order to raise profits, some businesses attempt to increase the bottom line
purely by cutting expenses [8]. While lying off employees and reducing product quality can
initially boost earnings and may even be necessary in cases where a company has lost its
competitiveness, there are only so many operating expenses that management can cut before the
quality of business operations is damaged [5][7].
An Economist article explains the "Big Data" conundrum facing global enterprises. Data
volumes are increasing faster than many companies have the capacity to store much less mine
them for insights. In this exploding data revolution many companies are also finding their
internal processesmuch less budgetsfor acquiring technology are not keeping up with
business user needs [11][12].
Thats why cloud computing is so attractive. With the public cloud model, compute, memory and
storage can be acquired on a pay per use basis. In the public cloud there is typically no
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hardware/software to buy upfront, thus companies can use operating expense budgets (Opex) to
fund their needs, giving them plenty of budgeting flexibility. The alternative is to purchase
needed hardware and software outrightthus capitalizing assets (Capex) [8][9]. According to
Pritwis Mukherjee the possibility of reducing both capital and operating costs by migrating
reams of data from private machines to the internet cloud is turning out to be a thrilling value
proposition for companies [19]. On the surface, going the Opex route seems to be the better
choice, but its a more complex decision than it seems.
One primary factor in the Capex vs. Opex debate really boils down to how much of each budget
a company has (as determined by the CFO) [9]. Moreover, plenty of small to medium size
businesses are capital constrained. They simply dont have tons of dollars to invest in assets. For
these companies it makes sense to discover options such as leasing or cloud that can convert a
given investment into an operating expense that would flow from SG&A on the income
statement.
While the initial impact of the Cloud has been primarily economic better, faster cheaper we
are beginning to see the transformative effects of Cloud technology on businesses especially
those run by larger companies [22]. This is because larger companies usually have more
significant capital budgets. That said they still must balance various and competing alternatives,
seeking the best return on investment [8][11]. These companies have capital budgeting processes
completed on an annual basis and theyre usually only capital constrained for unexpected midyear requirements or restricted based on investor and or industry.
In our proposed method we discussed how the Capex and Opex of the India Inc can be reduced
with the help of Cloud Computing in which IT resources are delivered in a pay as you go model
and we analyzed this with the help of an assessment tool for a telecom company with a range of
thousand employees in the following parameters.
1. Infrastructure Management
2. Service Delivery and Automation
3. Application Management
4. IT Maintenance
5. Improve IT Agility
6. Security and privacy
7. Operation Budget
8. Personnel Capacity Building
Infrastructure Management
When it comes for an industry infrastructure management it is the core component that must be
taken care of. Infrastructure management for an organization is the management of essential
operation components, such as policies, processes, equipment, data, human resources, and
external contacts for overall effectiveness. Hence this plays a major role in India Incs
Infrastructure Management which leads to the increase in the Capex as well as the Opex. It is
well known that the insurance as a part of Capex is invested for infrastructure Management.
Hence instead of building infrastructure from scratch every time India Inc can concentrate on
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building cloud based Infrastructure and getting them as a service (IaaS). IaaS model is highly
scalable, provides for On-Demand services, and shifts IT expenditure from CAPEX to OPEX
which is the most frequently cited, financial benefit of cloud computing [16] [23].
Service Delivery and Automation
In all Information Technology Enabled Services (ITES) the Service delivery and automation is
an undeniable process. Consider that the delivery system needs to be building consuming the
Human Resources, Technical Resources and Time this become a tedious activity. So instead of
building new services India Inc can use the cloud based service delivery and automation which
will make them as the more efficient users of the technology with the advanced new trend the
activity like change, configuration, provisioning, release, and asset management helps a lot in
reducing the cost and eliminating the errors.
Application Management
Application management is one of the most important activities that is need to be carried out in
the IT industry Where the application act as the interface between a customers business
processes and their IT infrastructure. Overtime Application becomes more and more complex for
example because of merges, acquisitions or global expansion. Different applications must be
interconnected to enable information sharing across organizational boundaries. Hence the
Application management when moved to the cloud environment will give relief from complex
application management tool. With a randomized application clustering and classification, cloud
can manage the
application in a very perfect way thereby minimizing running costs.
IT Maintenance
When it comes for the IT maintenance in Cloud based Environment The India Inc can maintain
the data in three different aspects namely.
Corrective Maintenance
This kind of maintenance technique involves the process of identifying the errors and rectifying
it. This system also enables fault tolerance up to certain level ie. till the data meets the Big
Data.
Adaptive Maintenance
This Special Maintenance Technique enables the India Incs Customers Business to enable
platform independency by creating a common cloud all over the business environment with a
temporary relocation to virtual cloud.
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Perfective Maintenance
This Specific Maintenance Solution provides Quality of Service (QoS) attribute which are nonfunctional of the IT industry such as the Reliability, Stability of the services of the cloud
environment.
Improve IT Agility
There are many ways for an IT industry to increase its agility. This paper suggests the selection
of agile services development which will provide strength to stabilize and will give more
reliability for the IT Business in a volatile environment like cloud. To improve Agility the
services that is delivered must be under gone through several tests is a good practice. Since the
cloud environment provides both the exploration and exploitation impact service the India Inc
will really grow more when the business activities are carried out through the Cloud
environment.
Security and privacy
On security we discussed about the application management, infrastructure management and
Service delivery Automation. These involves resource sharing and data transfer in a typical
multi-tenancy cloud environment. Security issues must be weighed to make sure that confidential
information remains protected from a cloud provider, or another cloud user, or even worse, a
competitor [21]. These two aspects involve sharing a lot of business secret which should be
shared in a secure manner on the cloud while replicating all the traditional administrative,
physical and technical security counter-measures. Application management allows all the clients
to access the data without no restriction constrains on such case a necessary security mechanism
should be enabled by the cloud provider. In this case when the system becomes distributed it is
hard to secure resources. Hence bringing all the resources to a central platform and securing it
becomes easy for an business environment (when it has a very strong security procedure suitable
for cloud environment).
Personnel Capacity Building
It is common knowledge that the strength of any organization has a direct proportionality with
the expertise and ingenuity of its workforce. Especially in most Indian SMEs skilled IT
manpower is required for handling and maintaining advanced IT applications and tools, and
these skilled personnel are usually difficult to retain due to issues like lack of career progression,
lower wages, etc [23]. This paper therefore further proposes that personnel development
initiatives are very crucial to sustaining the sure benefits of the CAPEX-OPEX migration
facilitated by cloud computing. Only an informed India Inc workforce can apply cloud
technology knowledge in consistently lowering the cost of business operations.
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RESULTS & DISCUSSION

In this section with the help of a Cloud assessment tool we calculate the average business priority
for a company ABC that has 1000+ employees working under it whose IT capabilities as well as
the IT business challenges faced by the industry that adapt their business and themselves to the
Cloud trend with the other peer industries. Our chart flow describes in detail about the security,
compliance, compatibility, High Capex as well as the Opex Budget challenges of the industries
Figure I. When we discuss about the IT capabilities of the industry the core component like
Infrastructure Management, Service delivery and Automation and Application Management were
takenas the scaling factor of the IT capabilities Fig II. When we talk about the business priorities
we prioritized lower IT cost, IT Agility Improvement and IT Maintenance Reduction Fig III.
between Lower Priority to Critical Priority.
Figure 1. IT Challenges (Average level)
Figure 2. IT Capabilities (Average level)
Figure 3. Business Priorities (Average level)
Compiting Industry
Opex Budget
High Capex
Compatability
Compliance
Low
Priority
Security
Critical
Priority
Industry Peers
Fig 1: IT Challenges Average Level
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Critical
Priority
Low
Infrastructure
Management
Service and Delivery

Application
Management
Compiting Industry
Industry Peers
Fig 2: IT Capabilities Average Level
Critical
Priority
Low
Lower IT Costs
Improve IT Agility
Reduce IT
Maintenance
Compiting Industry
Industry Peers
Fig 3: Business Priorities Average Level

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CONCLUSION
The emergence of cloud computing makes it seem like the skys the limit when it comes to new
opportunities to use technology to improve how business is done [21]. In this paper therefore, we
presented a procedure through which the Capex and Opex of the ITES industries in India can be
minimized by collecting the minimal requirements to run the industry with the help of the Cloud
Computing that provides Pay as you go model that leads to an optimal cost reduction in the
Capital and Operational Expenditure. Further optimization can be done based on requirements of
the corporate using cloud technology.
FURTHER RESEARCH
While this paper has attempted to propose cost-saving model of reducing CAPEX and OPEX of
ITES, three other mechanisms hold probable potentials that can be investigated further for
business cost reduction through which cost-savings can be generated [18] namely:
By lowering the opportunity cost of running technology
By lowering the total cost of ownership (TCO) of technology
By giving organizations the ability to add business value by renewed focus on core
activities
REFERENCE
[1] Gartner Says Cloud Consumers Need Brokerages to Unlock the Potential of Cloud
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[2] Cloud Service Brokerage defined from Gartner CBS in cloudEnvironment http://
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prm= 6_8_09_CCC.
[3] http://www.TheHindubusinessline .com/features/eworld /article3563234.ece?homepage
=true &ref = w l_home.
[4] Business Line:Global IT spending to reach $3.6 trillion this year:Gartner New Delhi,July9.
[5] http://www.cloudinfinit.com/campaign/?utm_source=google_adwords&utm_medium=cp c
&ututm_term=general&utm_content=Cloud_Computing&utm_campaign=Cloud_Comput-ing Services.
[6] http://www.vmware.com/products/datacenter-virtualizat-ion/it-business-management/over
view.html.
[7]ahttp://www.salesforce.com/platform/success_stories/stories/model_metrics.jsp.
[8] http://www.cloudtweaks.com/2011/08/model-metricsidentifies-top-five-enterprise-cloud- c
omputing-priorities.
[9] Three Cloud-Computing Data Security Risks That Cant be Overlooked By Slavik
Markovich, CTO of Sentrigo.
[10] Agent or Agentless based Monitoring from BMC Software Solutions .
[11] Cyril Onwubiko, Security Issues to Cloud Computing, in Cloud Computing: Principles
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[12] Wenjuan Li and Lingdi Ping, Trust Model to Enhance Security and Interoperability of
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LNCS 5931, pp. 6979, 2009.

[13] Cloud Computing: A CFOs Perspective.http:// h20195.www2. hp.com/v2/ GetPDF.aspx
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[14] The Financial Benefits of Cloud Computing. http://www.biztocloud.com/blog/cloudcomputing-san-diego/the-financial-benefits-of-cloud-computing Retrieved November 6th,
2012.
[15] Cloudonomics: The Economics of Cloud Computing. http:// www. Rack space. com/
knowledge_center/whitepaper/cloudonomics-the-economics-of-cloud-computing.
[16] Cloud computing help reduce costs. http://articles.economictimes.indiatimes.com/200906-25/news/27660448_1_internet-cloud-zoho-vendors.
[17] Cloud and the Future of Business, Part One. http://www. accenture.com /SiteCollection-Documents/PDF/Accenture-Cloud-Future-Business-Part-One-Promise-Transcript.pdf.
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INTERNATIONAL JOURNAL OF COMPUTER APPLICATION

Available online on http://www.rspublication.com/ijca/ijca_index.htm

ISSUE 2, VOLUME 6 (December 2012)