One of the biggest challenges that startups face is coming up with enough capital to fully launch their product or service. With regards to IT infrastructure, the sum of investments that small business owners need to make in order to be competitive can be staggering. Computing, networking, storage, and database costs can reach seven figures, even for startups.
Infrastructure as a service (IaaS) is one option that new ventures have for reducing capital expenditures. IaaS is a cloud-based model wherein businesses can access resources such as virtualized servers, networking, data storage, and computing power via the cloud. Quality is not compromised; for instance, virtual servers made available through the cloud offer the same power and performance as physical servers that a company would normally house onsite. As well, access to provisioned resources is made easy – usually done by logging into the platform through a web browser. IaaS users generally pay a monthly subscription or a pay-as-you-go fee for this service.
Going the IaaS route offers businesses a number of financial advantages:
1. Lower capital costs
Capital expenses – or CapEx – are reduced as large-scale hardware purchases are no longer a requirement. Rather than paying upfront to deploy an up-to-date infrastructure, businesses are able to access their own provisioned resources through the cloud. What would have traditionally been capital expenses, like purchasing a new mail or database server, are now monthly operational expenses, also known as OpEx. Since moving to IaaS, Fujitsu UK has realized over $4.5 million in CapEx savings.
2. Tax advantages of OpEx
Capital expenditures and operational expenditures are treated differently according to tax laws. CapEx investments have to be deducted as they depreciate over the course of several years. Conversely, operational costs can be expensed in the accounting period which they occurred. Instead of waiting upwards of five years to fully benefit from the deductible expenses, OpEx friendly investments provide full expensing benefits on a more frequent basis.
3. Predictability of OpEx
With Gartner reporting that 41% of CFOs are the key decision-makers for their company’s IT-related projects, sometimes getting a proposal approved depends on reducing its CapEx portion. CFOs prefer the predictability of OpEx; if they can be covered by the run-rate, projects are more likely to be greenlighted. On the other hand, if the project proposed to the CFO requires a substantial lump sum payment or for it to be financed at a potentially high rate, the project is more likely to be denied.
4. No costly upgrades
Staying up-to-date with the newest hardware can be nearly impossible. The price of purchasing new technology, the man-hours required to install it, and the downtime that occurs during migration are very costly. Fortunately for IaaS subscribers, the service provider is in charge of upgrades. Amazon’s AWS, Google’s Compute Engine, and Microsoft’s Azure have the latest technology in place and also have the systems and expertise on hand to eliminate downtime during a hardware upgrade.
5. Reducing labor costs
Startups most likely have a low IT admin-to-revenue ratio as they are forced to have a support team in place no matter their income. Outsourcing the network and server admin jobs to a cloud provider allows startups to reap the benefits of the host company’s economies of scale through labor cost savings. What’s more, now that IT staff members are freed from day-to-day maintenance tasks, they can focus on more strategic and long-term goals, as was the case for Preferred Hotel Group which migrated to Terremark’s IaaS platform.
6. Built-in redundancy
Another financial advantage to using IaaS services is that subscribers no longer need to build redundancy into their infrastructure that is moved to the cloud. Any reputable host has taken all necessary steps to eliminate single points of failure. Everything from power supplies to network cards have been made redundant and many components are hot swappable in order to keep clients’ operations running in the event of a hardware failure. This again means lower costs and lower revenue losses caused by downtime.
Of course, whether a company is better off hosting their own physical hardware or renting it through an IaaS provider depends on the company. For large enterprises whose economies of scales offer attractive cost savings, keeping resources onsite may be more effective. However, for new companies just starting out who have low capital reserves, unestablished credit, and unpredictable revenues and resource needs, IaaS may be the more viable solution.
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