![\"Debating](\"https:\/\/www.backblaze.com\/blog\/wp-content\/uploads\/2020\/02\/bb-bh-To-Buy-or-Not-to-Buy_v2.jpg\" "\\"To")
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When you work in a resource-constricted business or organization, committing to any kind of investment that doesn\u2019t directly contribute to your mission, your bottom line (or both) is incredibly hard. You only have a certain amount of cash, and if you\u2019re not using it to build something that immediately returns value to your bottom line, you feel like you\u2019re stealing from your own growth.<\/p>\n
This is the reality for many nonprofits, media companies, foundations, production houses, and arts organizations. They often invest in cash-intensive products\u2014music, video, literature, plays, service efforts, and\/or historical or cultural preservation\u2014that take months, if not years, to turn back into cash or grants the company can use for future efforts. Which means that, when it\u2019s time to make investments in the company\u2019s infrastructure, the decision making process can be brutal.<\/p>\n
Do you invest in your office: the metaphorical leaking roof over your head? New technology that might (or might not) make your job easier? And how<\/em> do you invest? Do you buy or rent? It all feels like a distraction from what you\u2019re supposed to be working on, and possibly a misallocation of funds that could be supporting your core mission.<\/p>\n We want to help you with the decision.<\/p>\n A growing reality for businesses is the cost of protecting their legacy: All of the video, audio, text, and other files that their organization has created over the years came at great expense, so there\u2019s no question that it needs to be appropriately stored and archived.<\/p>\n But, while the size of this data is growing, your budget to protect that data is most likely not. You have a decision to make: Try to manage this growth with an on-prem investment, or pay a cloud-based service to take care of it for you. In more simple terms, you\u2019re making an age-old budgeting decision:<\/p>\n Whether to make an extensive capital investment, or to commit to an ongoing operational expense. In financial jargon, you\u2019re debating \u201cCapEx\u201d vs. \u201cOpEx\u201d\u2014and you\u2019re not alone.<\/p>\n Let\u2019s break down the decision one step at a time. First things first, let\u2019s hammer out some terms in case you\u2019re already lost. (If you\u2019re roughly familiar with basic accounting principals, you can skip the following section. Otherwise, read on…)<\/p>\n Capital Expense (CapEx)<\/strong><\/em> (or expenditure, if you want to be fancy) is the price of buying or fixing an asset that will hold its value over time\u2014think: vehicles, buildings, equipment, land, or say… a network-attached server (NAS) or some other piece of technology. You\u2019re buying something that you will use over some period of time (often called its \u201cuseful life\u201d).<\/p>\n What\u2019s important to note is that this \u201cexpense\u201d does not immediately hit your operating budget. At first, this is entirely a balance sheet item: the cash you spent for it simply moves from \u201cCurrent Assets\u201d on your balance sheet to \u201cEquipment\u201d under your \u201cLong-term Assets.\u201d<\/p>\n Nice deal, right? No net change! My hardware is now \u201cfree\u201d for me except for the upkeep and power expenses. Not so fast.<\/p>\n Every type of capital asset has a \u201cdepreciation schedule.\u201d This is accountant lingo for: Things fall apart and aren\u2019t worth what you paid for them. So, the depreciation schedule is an estimation for how quickly or slowly an item loses its value to your business.<\/p>\n Technology typically depreciates on a 3 or 5 year basis. What this means is, if you buy a $10,000 NAS on January 1st, and your auditor determines its useful life to be 3 years, then your depreciation schedule will recognize a loss of $3,333.33 in value for the asset at the end of the year for the next three years. Once you reach three years the asset can be removed from your depreciation schedule and it isn\u2019t \u201cworth\u201d anything on your balance sheet anymore (though it may still be quite functional and an essential part of your IT infrastructure).<\/p>\n But, as we know: The whole idea in a balance sheet is that it \u201cbalances\u201d right? So if your assets are decreasing in value, you need to acknowledge that loss somewhere or your finances will be out of whack. So where does the decrease go? Into your operating budget! You have to acknowledge depreciation as an operating expense.<\/p>\n This is where your Capital Expense becomes an Operating Expense: The depreciation value has to go somewhere, and that somewhere is your bottom line. Accounting principles dictate that you have to incorporate the amount your assets have depreciated into your operating budget as an expense.<\/p>\n And that\u2019s how Capital Expense works (at least, from a very simple perspective). You buy something\u2014often pulling directly from your cash\u2014and then you acknowledge its expense incrementally, over a set schedule, in your operating budget.<\/p>\n Operating Expense (OpEx)<\/strong><\/em> is typically easier for folks to wrap their head around. These are the ongoing costs you incur to run your business or organization. Think: rent, internet, office supplies, kibble for the office cat\u2014that sort of thing. Unlike your capital expenses, the operating expenses hit your bottom line immediately, typically flowing through your general or administrative lines. No smoke and mirrors here\u2014you spend the money, you get what you paid for, your monthly financials reflect the expense, and hopefully it contributes positively to your bottom line!<\/p>\n We get it, the ins and outs of a balance sheet are tantalizing to a small number of people (sheepishly, I count myself amongst them). BUT: The implications of the difference between CapEx and OpEx can be hugely impactful when it comes to fulfilling your organization\u2019s mission or your businesses\u2019 goals.<\/p>\n Let\u2019s see if we can bring the implications into more useful perspective:<\/p>\n Let\u2019s say that you\u2019re an organization with a growing archive of data, and you have a reliable projection for your data growth rate over the coming years. Maybe you\u2019re a music education nonprofit, and part of your mission is archiving the performance recordings of all<\/em> of your students for their use in future school applications or tryouts.<\/p>\n You have around 200TB worth of data that you need to get onto a more reliable, accessible storage media ASAP (your volunteer librarian just retired and now nobody knows how she organized the tape archive\u2026 bummer). What do you do?<\/p>\n You call your freelance IT consultant, and they give you two options:<\/p>\n 1) An On-Prem Storage Solution:<\/strong><\/em> The simplest way to describe an on-premises solution is: A machine that is visible. It\u2019s in a space you own or rent, it is \u201cbought and paid for,\u201d and your auditor or bookkeeper flagged that it should be depreciated.<\/p>\n Data storage comes in \u201con-prem\u201d shapes and sizes too. Whether it\u2019s a Network Attached Server (NAS) or a Storage Area Network (SAN)<\/a>, your IT guy will quote out something for you to plug in onsite that will take care of your archiving issue. This type of storage is a capital expense.<\/p>\n 2) A Cloud Storage Solution:<\/strong><\/em> The \u201ccloud\u201d is often described as \u201csomeone else\u2019s computer.\u201d It\u2019s a pretty apt description in this case. In a cloud storage solution<\/a>, you pay another company\u2014typically on a monthly basis\u2014to store, protect, and maintain your data. So if on-prem is a \u201cvisible\u201d solution, this is an \u201cinvisible\u201d solution. And because it\u2019s a service, it\u2019s a simple monthly operating expense. Cloud storage doesn\u2019t depreciate because the company providing is constantly paying to maintain.<\/p>\n Let\u2019s say you have roughly 200TB you need to get into a better archiving solution. This is about 25 years worth of content, so you\u2019re expecting (with a little room for data inflation) to add around 30 Terabytes a year of data. What will your two options really cost you, once we pull apart the financial jargon?<\/p>\n For your server hardware, your hard drives, and a reliable power supply unit, you\u2019ll likely end up paying around $25,000. Let\u2019s assume your audit determines a useful life of three years for the server, that means you\u2019ll have a depreciation of $694 per month.<\/p>\n Don\u2019t forget, however, that you\u2019ll need to pay for power and possibly cooling (estimated around $100 per month for this size of server), some IT assistance to help with upgrades and maintenance (let\u2019s say $50 per month), and you have to pay for the space to hold it. We\u2019ll leave the latter at zero\u2014you probably have a closet somewhere<\/em>.<\/p>\n So all in, you\u2019ll need to lay out $25K in cash at the outset, and then you\u2019ll be recognizing the expense in your operating expense to the tune of $850 every month for the next 3 years.<\/p>\n The biggest expense on the front end of a cloud solution is the expense of ingesting data. There are a number of services you can use, but it\u2019s easiest for us to quote out our own: B2 Cloud Storage<\/a>. If you want to move quickly, you can rent our Fireballs<\/a>, which we\u2019ll ship to you at a price of $550 per month, and you can upload 70TB at a time and ship them back to us for upload. So, all together, you\u2019d pay $1,650 for the trouble of moving the data at the speed of FedEx, which is typically far faster than the internet. (If you have the time to let your data upload over the internet for months, then you can do that for far less). We\u2019ll spread this expense across 3 years to make our comparison more apples-to-apples. So let\u2019s say $46 a month.<\/p>\n After this initial expense, you simply have to pay a monthly data storage bill. We\u2019ll use Backblaze B2 for estimating. At 200TB, you\u2019ll be paying $1,000 a month, right now, but that number will grow along with your data, at $5\/TB.<\/p>\n So you\u2019re laying out $1,500 in your first month, then $1,000 a month, growing at $5\/TB per month.<\/p>\n To emerge from the weeds for a moment: The simple difference between these two options is a few hundred dollars on a month to month basis. Let\u2019s explore what those hundreds get you when it comes to your cash flow, long-term flexibility, maintenance, and your real estate bill.<\/p>\n On-Prem Storage Solution:<\/em> On day one working with your NAS or SAN, you\u2019re out $25,000. And unless the hardware is defective, you will never be able to get that full value back.<\/p>\n Cloud Storage Solution: <\/em>By the end of \u201cmonth one\u201d for Cloud, you might be out $1,000, maybe $2,000, depending on the upload service you use and the upload speeds you achieve.<\/p>\n So the question here is: How important is cash flow to you? What\u2019s the opportunity cost of not being able to use that $22K for something else?<\/p>\n How good of a forecaster are you? It may sound like an odd question but it\u2019s actually critical to choosing the right solution. If you can accurately forecast the data needs of your company for the next five years you should be able to pick an on-prem solution that will match those needs. On the other hand if you are off in either direction you will end up spending money inefficiently. Let\u2019s take a look at how both scenarios play out.<\/p>\n Overestimating Data Needs:<\/strong><\/p>\n On-Prem Storage Solution:<\/em> On day two working with your NAS or SAN, you are locked in to your investment of $25,000. You can\u2019t return it, you can\u2019t make it smaller. And the decrease in cash is only the beginning of your commitment. On an annual or monthly basis, going forward, you will need to recognize your investment\u2019s depreciation, which will be a fixed amount no matter how long the hardware is in operation.<\/p>\n Cloud Storage Solution:<\/em> On day two working in the cloud, you could choose to deprecate some of your data or recategorize it, and decrease your monthly spend. Alternatively, you could change cloud services if your existing arrangement isn\u2019t working. The important thing is, you are not locked in to investment, and you can exit the arrangement at any time.<\/p>\n Underestimating Data Needs:<\/strong><\/p>\n On-Prem Storage Solution:<\/em> On day 425 you might realize that your NAS or SAN isn\u2019t going to be enough storage for your operations. Most organizations make budgets for their operations, and most of them wouldn\u2019t mind beating<\/em> those projections. The problem is, if you\u2019re able to achieve more in a given year, you will likely also generate more data in that year. If your business takes off and you\u2019re locked into an on-prem solution, your only remedy will be to invest in higher capacity drives, or even to add an additional<\/em> storage solution, both of which incur additional upfront cash outlays.<\/p>\n Cloud Storage Solution:<\/em> If you reach day 425 and your organization is unexpectedly beating projections by a significant margin, your cloud storage service can easily scale to match your needs. Your monthly expense will increase but only at a fractional percentage since no new equipment will need to be purchased.<\/p>\n The questions here are: Are you ready to project how your data will scale over the next three to five years? And are you ready to cover the costs if you\u2019re wrong?<\/p>\n On-Prem Storage Solution:<\/em> On day 483, your NAS or SAN may not keep up with technology, or it may disagree with some other tech you need. But you\u2019re stuck with it, and you\u2019re stuck with the tab of paying to maintain and troubleshoot the aging technology. Whether you have your own IT staff, or hire consultants or an IT service, this could add significant cost to your overall on-prem storage budget. And it goes without saying that your server could simply cease functioning at any time.<\/p>\n
\nCapital Expense (CapEx) vs. Operating Expense (OpEx)<\/strong><\/h2>\n
![\"NAS](\"https:\/\/www.backblaze.com\/blog\/wp-content\/uploads\/2020\/02\/Screen-Shot-2020-02-19-at-1.59.04-PM-1024x154.png\" "\\"What")
<\/p>\nWhat is CapEx?<\/h3>\n
Side note:<\/strong> Some companies account for depreciation on a monthly basis, to avoid year-end surprises in heavy depreciation bills.<\/div>\nWhat is OpEx?<\/h3>\n
\n![\"Backblaze](\"https:\/\/www.backblaze.com\/blog\/wp-content\/uploads\/2020\/02\/Screen-Shot-2020-02-19-at-1.58.33-PM-1024x140.png\" "\\"Why")
<\/p>\nWhy Do CapEx and Opex Matter for Data Storage?<\/strong><\/h2>\n
\nWhat is This Really<\/em> Going to Cost?<\/strong><\/h2>\n
![\"A](\"https:\/\/www.backblaze.com\/blog\/wp-content\/uploads\/2020\/02\/Screen-Shot-2020-02-19-at-2.28.46-PM-1024x165.png\" "\\"What")
<\/p>\nOn-Prem Storage Solution:<\/h3>\n
Cloud Storage Solution:<\/h3>\n
![\"Balance](\"https:\/\/www.backblaze.com\/blog\/wp-content\/uploads\/2020\/02\/Screen-Shot-2020-02-19-at-2.33.54-PM-1024x652.png\")
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\nSide note:<\/strong> you can calculate your own costs using the B2 cloud storage calculator<\/a>.<\/div>\nWhat\u2019s the Real Difference? Or, What Are a Few Hundred Dollars Worth?<\/strong><\/h2>\n
Cash Flow<\/h3>\n
Long-Term Flexibility<\/h3>\n
Upkeep, Updates, and Repairs<\/h3>\n
![\"Projected](\"https:\/\/www.backblaze.com\/blog\/wp-content\/uploads\/2020\/02\/Screen-Shot-2020-02-19-at-1.45.43-PM.png\")
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