By Steve Swiecichowski, Director of Service Delivery
When you buy a car, do you buy it with cash or do you finance it over time? And if you do finance it, do you buy the extended warranty? Most people have tried this both ways, but in typical American households, buying a brand-new car represents a capital outlay that many families just aren’t prepared for at the exact moment when the old car breaks down. So they buy or lease the car on terms, and often, they work an extended warranty into those terms so that the experts at the dealership can take care of any problems that arise throughout the length of the contract. This helps people keep their household budgets in line, and it gives them some protection from unforeseen circumstances. Most importantly, it makes their car payment a predictable line item that fits comfortably into their monthly household budget.
In much the same way, many businesses are now opting for complete, bundled as-a-service IT solutions that managed service providers (MSPs) like SRC Technologies offer to help them restructure capital IT purchases as more affordable and stable monthly operational expenses.
A perfect case in point: We recently had a client – a large wholesaler – that needed a new backup and data protection solution. The client had looked into buying the hardware and software needed to create the solution’s foundation, then planned to hire in-house IT personnel to manage it for them. The problem was, the hardware and software alone represented a more than $50,000 capital expense. Add to that about 25 percent more for an annual maintenance contract and another $2,000 per month in salary for an employee to manage the system, and the costs were quickly mounting. In three years, the client would have spent nearly $160,000 to purchase and maintain this solution, much of it in up-front cap-ex costs that depleted their working capital.
While looking for more affordable alternatives, they approached SRC to investigate what we could deliver with an as-a-service op-ex option. Over that same three-year period, we were able to offer them a $3,000 per month bundled as-a-service package that included the hardware, software, maintenance and management of the solution – a total outlay of about $108,000 vs. the $160,000 they were considering spending by doing this on their own over the same time period. The op-ex option also provided them with the ability to keep their $50,000 of capital in the bank, spreading the payments out as a predictable $3,000 per month for three years.
By moving to an as-a-service op-ex model, they gained a complete and fully managed backup-as-a-service solution bundled with disaster recovery as-a-service, kept the costs to a predictable monthly fee, and kept their $50,000 in the bank to use as working capital. They didn’t need to hire additional personnel, buy or maintain hardware or software, or deal with refresh issues as the technology matured.
As I began writing this blog, I realized that their experience points out four key reasons that an op-ex as-a-service solution often makes good business sense.
- Financial Advantages: Ensuring that your monthly budget is predictable and that your business is as insulated as possible from unexpected demands for capital expenditures is always a step in the right direction – and a way to keep your CFO smiling.
- Specialized Expertise: By relying on an as-a-service model, particularly in areas in which your own internal team does not have a particular skill or bandwidth to spare, you can tap into the expertise of your managed services partner while freeing your own internal team to work on projects that are more strategic to the organization.
- Tax Advantages: While every situation is different, capital expenditures for information technology can be costly and complicated, requiring large up-front cash outlays and difficult-to-calculate estimated depreciations on that equipment as it matures. With an as-a-service solution, you can transform that capital expense into an operational expense that is both predictable and complete, surprise-free, and without the need to factor in depreciation of the assets.
- Equipment Refresh: If you purchase the hardware and software yourself, it is your job to keep it updated. But when you use an as-a-service methodology, technology refresh becomes the responsibility of the MSP that sold you the contract. You are buying a service – and you’ll have a service-level agreement (SLA) that clearly defines how that service is to be delivered. The equipment is a means to the end – and in an as-a-service op-ex model, it will not be your responsibility to maintain, refresh or replace it.
Sound too good to be true? In some cases, it might be. As-a-service op-ex models are not right for every circumstance. If you already have plenty of working capital in the bank, predictable monthly expenses, and a positive financial forecast, it might make sense to purchase the equipment up front and take your tax savings based on a five-year depreciation – particularly if you already have IT personnel whose plates are not yet full so you won’t need to make additional investments in labor.
It’s important, therefore, to actually do a careful cost comparison when facing any kind of capital IT expense. While there are certainly cash-flow perks and other advantages to the as-a-service op-ex model, each case must be examined independently to learn what will work best for your specific situation.
Want to learn more? This blog post by B.J. Havlik, President and CEO of SRC Technologies, helps you assess your return on IT investment. Next, read “How Managed Services Helps You Overcome the ‘Balancing Act’ Dilemma” to learn what a managed services relationship looks like in practice as well as the top three ways to identify the right co-managed services partner. Worried about turning over the keys to your IT kingdom to an MSP partner? Don’t be! This blog explains how to establish a deep, intuitive MSP relationship that feels like an extension of your team – not a replacement of it.