Capital and Operational Expenditures

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Time
3 hours 51 minutes
Difficulty
Beginner
CEU/CPE
4
Video Transcription
00:00
In order to understand how the cloud changed the paradigm of doing business, we need to get into accounting.
00:06
Let's see how I T infrastructure was managed in the past and how it's changed since the cloud vendors started offering their services
00:14
to conduct business. In the past, companies had to make significant upfront investments in the infrastructure.
00:20
This is called a capital expenditure, and the value gets reduced over time through depreciation.
00:28
Here are a few examples of capital expenditures
00:31
The first one is the server cost.
00:34
When you require hardware, you need to think about many other things like, for example, fault, tolerance and redundancy. You need to duplicate different components in order to ensure that if one fails, you can continue to serve your customers.
00:47
You need to think about clustering. Redundant power supplies or UPS is if, for example, the power goes down.
00:55
Also, when something breaks, you need to spend money to go and acquire a replacement component. This can impact your cash flow.
01:03
Next is the storage cost.
01:06
Centralized storage can cost a lot of money because there are specialized to raise that you need to deploy in your data center.
01:12
Also, you need to have personnel that is capable of managing the arrays.
01:18
You also have to think about different tiers of storage, faster storage or slower storage for data that doesn't get access to often.
01:26
Networking costs include not only the hardware components like switches, routers and firewalls, but also things like wide area connections or fast connections to the Internet.
01:37
You need to work not only with the hardware supplier, but also with a telecommunication company in order to ensure fast connection to the Internet.
01:46
Backup and archival costs may require different storage tiers,
01:49
for example,
01:51
tapes for offline storage.
01:53
This also may require a facility, which is offline where you store the tapes.
01:59
Business continuity and disaster recovery requires you to think about building a secondary data center that is far enough away in order to not be impacted if disaster occurs.
02:09
This is a significant upfront cost that you need to think about
02:15
also for your primary data center, you need to think about backup generators if the power goes down.
02:21
There are numerous infrastructure costs related to the data center, starting from building a building and building maintenance as well as electricity cooling like water,
02:30
floor space and Finally, the technical personnel,
02:35
you need to have a highly skilled technical personnel in order to support your data center.
02:42
The capital expenditure model does have certain benefits, though
02:45
First it is a fixed cost. You can predict
02:47
very closely how much you're going to spend for building your data centers and maintaining them.
02:53
It is a budget friendly approach, so you can. You can dedicate initial budget and say, I'm only going to spend within this budget.
03:01
It is, of course, easy for planning because you know the initial cost. You know how much of the budget it is, and you can track those expenses throughout your project.
03:14
There is another expenditure model that is enabled by the cloud.
03:17
It's called operational expenditures model.
03:21
You incur operational expenditures every month, and you expense those at the same time that you incurred them.
03:29
Those expenditures are incurred for buying services and products.
03:34
For example, you're leasing cloud infrastructure to run your application.
03:38
You pay for this infrastructure every month. You're also leasing cloud software, for example, operating system software or framework software or any other type of software
03:49
you pay every month. A fee for just leasing the software
03:53
you can also incur expenditures for scaling your resources.
03:57
If you have spikes in your consumption, you may need more servers this month, and you would pay more that particular month.
04:03
You can also incur expenditures for per user billing.
04:08
Let's say you're paying licenses for some software as a service like
04:12
Office 3 65 or dynamics and you pay for every user.
04:17
There are certain benefits that come with the operational expenditures model.
04:21
Let's take one example.
04:24
Assume that you have an application or a business that will scale linearly.
04:29
This is your demand prediction for your resources.
04:32
If you are using a capital expenditure model in order to satisfy this demand at certain points, you need to incur expenses to buy additional hardware to support your growth.
04:45
Let's say at this point you need to grow your hardware expenses so much in order to support it through here.
04:51
Here again, you incur operational expenditures to buy new hardware and so on.
04:59
However
05:00
your real demand maybe like this
05:04
here it's going up.
05:06
It's covered by the infrastructure that you have already acquired.
05:11
However, in this particular point,
05:13
you don't have enough infrastructure in order to satisfy your demand.
05:16
If you use the cloud, you can implement the auto scaling consumption model, where you'll bring up new infrastructure when you need it, and you'll remove it when you don't need it.
05:27
Using this model, you can very closely follow the resource demand that is generated by your customers and spend money only when you need to actually spend that money or satisfy customer needs.
05:39
This is in contrast to the capital expenditure model, where you have, for example, in this particular case unused resources that are sitting idle.
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