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Welcome to the Strafford Blog

Should you use OpEx or CapEx for your EPM App Investment?

Posted by Deborah Jelley

Mar 15, 2018 9:22:00 AM

CapEx vs OpEx for MAH

The recent passage of the 2017 Tax overhaul bill has brought this question back to the forefront for companies looking to invest in EPM solutions. We recommend that using Managed Application Hosting (MAH) in the cloud, which is funded, via operating expenses (OpEx) through a monthly subscription, is the right direction. Trying to develop and maintain an on premises EPM application, like Oracle’s Hyperion Planning and HFM, despite having faster write-down Capital Expense (CapEx) options available would cost more in operating expense in the long run. There are hidden costs to running an on premises application that aren’t handled by a CapEx investment write-down, and those hidden and escalating costs (like on-going hardware upgrades, salary and insurance to pay people to maintain the EPM environment) go away when you move to the cloud.

Below you'll find additional information on how we arrived at this recommendation...

First, some definitions. 

  • Operating expense (or OpEx) is defined as the ongoing costs a company pays to run its basic business and focuses on the short term.  In contrast to capital expenditures, operating expenses are fully tax-deductible in the year they are made.  As operating expenses make up the bulk of a company’s regular costs, management continuously examines ways to lower operating expenses without causing a critical drop in quality or production output. 

  • Capital expenditures (or CapEx) are funds a business uses to purchase major physical goods or services to expand the company’s abilities to generate profits and focuses on the long term. 

Pre-Tax Overhaul Act:  Before the passage of 2017’s Tax Cuts and Jobs Act, a company’s decision-making process to either keep their EPM system on premises (typically a long-term CapEx) or to use the cloud to host the application (typically an OpEx) was nuanced.  The C-Suite needed to look at their company’s overall capital structure, and determine how to raise the money for that purchase, and of course the impact to profit on servicing the resulting debt.  To help with these financing decisions, an investment in an EPM system like Oracle’s Hyperion applications was usually a candidate for capitalization and amortization over some number of years – like 5 years.  Ideally, the company would fully amortize the expense as soon as legally possible, thereby freeing up capital to be put to work for the company again, and reducing the overall debt and interest load or equity financing complications.  Where the nuance came in was when the cloud option became more viable and secure for EPM solutions, and deployment could be paid for through operating expense.  Very tempting to funnel the cost of an EPM app investment into OpEx via a reasonable monthly subscription, while saving capital funds for extending and growing the company in other, more direct ways.  Companies who made the decision to move their EPM application to the cloud and pay a monthly subscription fee instead of heavy up-front investment costs, did so with the understanding that they got more out of the arrangement than just a financial handling plan. 

Moving their EPM applications to the cloud, and/or more specifically to a MAH firm, like Strafford, gives companies a clear contract with outside firms who would support the environment, keep the environment patched and upgraded, and reduce the need to hire that kind of talent in-house.  Managed application hosting delivers a service where both the environment and the software receives support through a contract and is a viable and attractive option than a Software as a Service (SaaS) hosted environment.  Managed application hosting offers companies additional talent to help keep their EPM systems running, up-to-date and have ready access to troubleshooting. A win-win for many companies who opted to move their applications to MAH.  Again, financing of this function would occur through short term OpEx and the company would gain additional benefits, such as being fully supported, by signing up than just a reduction of debt impact on the bottom line. 

After Passage of the Tax Overhaul Act:  The new tax overhaul act reduces the corporate income tax rate and greatly accelerates expensing of capital investment for short-lived assets.  Accordingly, if a company were to invest in EPM solutions today, the C-Suite must consider the new available option to write-down their capital investment costs within the first year.  Would this feature make the option to keep their applications in-house and have the expense be fully deductible more attractive? Or would the significant cut to the corporate income tax rate enable the company to use the savings to fund a hosting subscription?

Here’s some food for thought on that topic: let’s look at if keeping the application in-house is what companies really want.  Given that managed application hosting offers a software support service along with the hosting feature, a company wouldn’t have to oversee that aspect of their EPM system, and they wouldn’t have to continue to upgrade hardware and staff up to support the on-premises application and environment.  Access to seasoned consultants to help troubleshoot the application and assist with upgrades, administration and other things really is the key win in this situation rather than trying to figure out how to capitalize the investment to improve cash flow back to the company.  All in all, if you can get a company like Strafford to cloud host and help you manage the application, and you fund this activity through OpEx, you save your CapEx activities for other revenue-generating investments.  A win-win!

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Topics: Cloud Hosting, Cloud EPM, Managed Services, Finance Best Practices