From CAPEX to OPEX: Cloud Migration and Your 2023 IT Budget

Whether you want to or not, moving some computing to the cloud may be in your future for 2023.

The technology hardware components that you bought three, four, and five years ago are aging out — they’re no longer reliable. You need to buy new ones, but supply chain volatility continues so servers and other hardware components are hard to find, more expensive, and backordered by up to a year. 

Massive hyperscalers like AWS, Microsoft, and Google aren’t helping. They’re first in line for new equipment while the rest of the world waits for what’s left over or is willing to pay a premium. 

If your hardware is aging out, you have to choose between the risk of using old equipment, finding creative workarounds, or moving to the cloud.

Most companies are choosing the cloud.

Cloud migration and converting to OPEX is one of the five key differences in IT Budgeting for 2023. Here’s why and what Leapfrog is seeing within our client base.

The upside of the rush to digital transformation 

At the beginning of the pandemic, companies learned that moving to the cloud doesn’t have to take as long as they once thought. They were able to complete cloud migration projects quickly, sometimes within weeks instead of months, as they rushed to digitally transform. 

Companies accelerated digitization for interactions and internal operations by three to four years and accelerated their share of digital or digitally enabled products by seven years, according to a McKinsey Global Survey of executives. 

Along with shortened timelines, many companies learned firsthand that the cloud is a more scalable, flexible way to engage with customers, deliver services, and meet their business goals — they have no plans to go back to data centers. 

The downside of the rush to digital transformation

On the other hand, many companies that moved to the cloud quickly still have technology cleanup to do. 

The shortened timelines left a wake of IT challenges to deal with later, primarily security gaps, hybrid-environment issues, and other technical debt. If you’re one of these companies, all of these challenges need to be addressed sooner rather than later — finishing the digital transformations you’ve already made and paying off any technical debt should be priorities in your 2023 IT budget. 

Paying off technical debt

Technical debt is the work it will take to correct technologies operating in environments that were rushed into production or put on the back burner. It was an enormous problem before the pandemic-driven rush to transform (international conferences on managing technical debt were plentiful), and now it’s much worse.

Technical debt that makes apps unable to migrate or incapable of supporting higher bandwidth — or is unstructured or unorganized — prevents companies from being able to jump to the cloud when they can’t find the hardware components they need. 

An option is to start fresh. For companies drowning in technical debt, it might be best to start all over in the cloud and not deal with the debt.

Can you save money by moving to the cloud?

Pre-pandemic, most companies made CAPEX and OPEX decisions based on a variety of factors, cost being only one of them. Now that the cost of not switching to the cloud can be far higher if your aging systems fail — cost takes on a new meaning.

While changing to an OPEX model can initially defer a large CAPEX investment because you have fewer physical things to buy, remember there’s more to the cost of switching to the cloud than just the subscriptions. 

In addition to paying off technical debt, you’ll have to pay for migration, integration, training employees on new platforms, and managing IT environments that have become more heavily hybrid. 

So you need to budget for the activities required to make digital transformation happen. 

Prices are higher for cloud services now, too, and subscription costs add up over time compared to one-time hardware investments. 

Cloud fees have increased by 12-20% since pre-pandemic, impacting all three budget areas — Run, Grow, and Transform. The good news is that the price increases have not been as high in 2022 as in 2021.

How much more are companies spending on the cloud?

Computer Economics of Avasant Research reports in its 2022-2023 IT Spending & Staffing Benchmarks Executive Summary that IT budget growth is broad, with 80% of companies increasing operational budgets, which includes OPEX

The report found that 11% of respondents reported cloud subscriptions accounted for at least 75% of their business software spending in 2020, and in 2022 it was up to 17% — about a 50% increase. Conversely, capital budgets made up 21% of total IT budgets in 2016 and 13% of total IT budgets in 2022 — about a 40% decrease. 

According to the report, most organizations are giving IT departments the resources they need to operate effectively. 

What Leapfrog is seeing within our client base

Leapfrog is seeing the same cloud spending increases as reported in a recent Gartner survey on global IT spending trends — about a 12% increase in spending on SaaS and about a 7% spending decrease on data centers. 

But not all of our clients are excited about moving to the cloud. The data from Leapfrog’s client base of medium-size businesses shows that ROI is typically higher with CAPEX over several years than with OPEX (OPEX can be twice as expensive), which isn’t encouraging from a budget perspective.

And if our clients have internal IT teams that have spent entire careers managing traditional environments, moving to the cloud even temporarily represents a loss to them even though our team assures them that we can revert back later or design a hybrid solution once supply chains have normalized. 

When pricing out options for new components, Leapfrog can usually turn around ballpark numbers and delivery estimates within a few weeks, including estimates for components that are hard to find — we buy hardware and cloud services nonstop. We also can turn around cloud pricing quickly so our clients can compare the two different models.

When moving to the cloud is not an option

When Leapfrog clients want to keep computing in data centers, or when moving to the cloud is not a viable option for them even temporarily, we work to design creative solutions. Our clients want designs with minimal physical assets to reduce the cost of securing, managing, and patching those assets, and they want to avoid equipment from aging out at inconvenient times.

Leapfrog’s goal is to modernize their environments, regardless of supply chain shortages, whether that involves moving to the cloud or not. 

Budget advice and caveats

There are definite advantages to computing in the cloud, whether permanently or just to weather the storm. Budgeting realistically for 2023 starts you off on the right foot:

  • Budget for the migration project and ongoing management in addition to cloud subscriptions
  • Read the fine print to avoid signing up and paying for more cloud services than you need
  • Consider locking in fixed commitments on extended contracts to get better deals
  • Use a partner to manage the transitions more easily and affordably
  • Consider a cloud service provider’s staying power when choosing between options to avoid remigrating after an M&A

Leapfrog has been providing cloud management services since our inception. We have well-established partnerships with all of the industry’s leading cloud service providers, are vendor-agnostic, and help clients choose the options that will work best for their business goals, IT environments, and budgets.

For a deeper discussion of the five key budget changes and how they impact your 2023 budget, download Leapfrog’s report, Making Sense of What’s Different for IT Budgeting in 2023.