Posts Tagged 'Metric'

April 14, 2009

EVA, Cloud Computing, and the Capex vs. Opex Debate

So far in 2009, there’s been a fair amount of discussion pro and con regarding the financial benefits (or lack thereof) of cloud computing. It’s very reminiscent of the whole “do-it-yourself” or “outsource it” debate. Blog posts like this and articles like this are samples of the recent debate.

One thing I have not yet seen or heard discussed regarding cloud computing is the concept of EVA, or Economic Value Added. Let me add at this point that EVA is a registered service mark of EVA Dimensions LLC and of Stern Stewart & Co. It is the concept of economic income instead of accounting income. SoftLayer subscribes to software from EVA Dimensions LLC. Get more info here.

For you to buy into the premise of this post, you’ll have to be sold on EVA as a valuable metric. Bottom line, EVA cleans up the distortions of GAAP and aligns all areas of the business so that more EVA is always better than less EVA. Most other metrics when pushed to extremes can actually harm a business, but not EVA. Yes, even bottom line GAAP net income when pushed to an extreme can harm a business. (How that can happen is fodder for another blog post.) Several books have been written about EVA and its benefits, so that’s too much to write about in this post. This is a good summary link, and for more info you can Google it on your own. And if you do Google it on your own, be warned that you may have to wade through links regarding Eva Longoria and/or Eva Mendes .

Part of the Cloud computing debate revolves around “capex vs. opex.” Specifically, this involves paying for IT infrastructure yourself using capital expenditures (“capex”) or employing Cloud computing and buying IT infrastructure with operating expenditures (“opex”). Geva Perry recently said, “There is no reason to think that there is a financial benefit to making an OpEx expense vs. CapEx expense. Period.” I disagree. When you look at this in terms of EVA, whether you use capex or opex can make a big difference in creating value for your business.

Let’s look at the effect of switching capex to opex on EVA. Coca-Cola is a company that employs EVA. Years ago, they decided to ship their beverage concentrate in single-use cardboard containers instead of reusable stainless steel. This made GAAP measures worse – profit and profit margins actually went down. But EVA went up by making the move from capex to opex. How can this be? Grab something caffeinated and check out some numbers here if you dare.

OK, that’s all fine. But how would shifting IT spending from capex to opex affect EVA? Glad you asked. Last summer, I modeled some full-fledged financials to illustrate financial benefits of outsourcing IT vs. doing it yourself. I’ve taken those and added the EVA calcs to them. Take another swig of caffeine and check them out here and here.

Assuming that EVA is a worthwhile metric (and I think it is), moving capex to opex is possibly a very good financial decision. Any questions? As always, your mileage may vary. Model carefully!

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