Capital and Operational Expenditures

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Time
3 hours 51 minutes
Difficulty
Beginner
CEU/CPE
4
Video Transcription
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>> In order to understand how
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the Cloud change the paradigm of doing business,
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we need to get into accounting.
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Let's see how IT infrastructure
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was managed in the past and
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how it's changed since
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the Cloud vendors started offering their services.
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To conduct business in the past,
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companies had to make
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significant upfront investments in the IT infrastructure.
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This is called a capital expenditure,
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and the value gets reduced
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over time through depreciation.
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Here are a few examples of capital expenditures.
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The first one is the server cost.
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When you acquire hardware,
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you need to think about many other things like,
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for example, fault tolerance and redundancy.
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You need to duplicate different components in
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order to ensure that if one fails,
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you can continue to serve your customers.
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You need to think about clustering
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redundant power supplies or UPS's if,
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for example, the power goes down.
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Also, when something breaks,
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you need to spend money to go and
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acquire a replacement component.
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This can impact your cash flow.
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Next is the storage cost.
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Centralized storage can cost
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a lot of money because there are
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specialized arrays that you need to
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deploy in your datacenter.
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Also, you need to have personnel that
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is capable of managing the arrays.
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You also have to think about different tiers of storage.
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Faster storage or slower storage for
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data that doesn't get access too often.
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Networking costs include not
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only the hardware components like switches,
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routers and firewalls, but also things like
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wide area connections or
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fast connections to the Internet.
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You need to work not only with the hardware supplier,
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but also with a telecommunication company
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in order to ensure fast connection to the Internet.
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Backup and archival costs
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may require different storage tiers,
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for example, tapes for offline storage.
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This also may require a facility which
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is offline where you store the tapes.
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Business continuity and disaster recovery
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requires you to think about building
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a secondary datacenter that is far enough away in
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order to not be impacted if disaster occurs.
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This is a significant upfront cost
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that you need to think about.
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Also, for your primary datacenter,
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you need to think about backup generators
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if the power goes down.
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There are numerous infrastructure costs
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related to the datacenter,
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starting from building a building and
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building maintenance as well as electricity,
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cooling like water,
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floor space and finally, the technical personnel.
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You need to have
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a highly skilled technical personnel
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in order to support your datacenter.
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The capital expenditure model
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does have certain benefits though.
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First, it is a fixed cost.
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You can predict very closely how
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much you're going to spend for building
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your datacenters and maintaining them.
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It is a budget-friendly approach.
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So you can dedicate initial budget and say,
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I'm only going to spend within this budget.
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It is, of course, easy for planning
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because you know the initial cost,
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you know how much of the budget it is,
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and you can track those expenses throughout your project.
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There is another expenditure model
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that is enabled by the Cloud.
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It's called operational expenditures model.
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You incur operational expenditures every
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month and you expense those
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at the same time that you incurred them.
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Those expenditures are incurred
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for buying services and products.
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For example, you are leasing
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Cloud infrastructure to run your application.
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You pay for this infrastructure every month.
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You're also leasing Cloud software, for example,
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operating system software or
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framework software or any other type of software.
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You pay every month a fee for just leasing the software.
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You can also incur expenditures
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for scaling your resources.
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If you have spikes in your consumption,
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you may need more servers this month and
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you would pay more that particular month.
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You can also incur expenditures for per-user billing.
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Let's say you're paying licenses for some
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software-as-a-service like Office 365 or Dynamics,
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and you pay for every user.
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There are certain benefits that come
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with the operational expenditures model.
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Let's take one example.
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Assume that you have an application or
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a business that will scale linearly.
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This is your demand prediction for your resources.
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If you are using a capital expenditure model in
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order to satisfy this demand at certain points,
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you need to incur expenses to buy
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additional hardware to support your growth.
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Let's say at this point,
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you need to grow your hardware expenses so
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much in order to support it through here.
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Here again, you incur
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operational expenditures to buy new hardware and so on.
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However, your real demand may be like this.
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Here, it's going up,
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it's covered by the infrastructure
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that you have already acquired.
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However, in this particular point,
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you don't have enough infrastructure
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in order to satisfy your demand.
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If you use the Cloud,
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you can implement the auto-scaling consumption model,
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where you'll bring up
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new infrastructure when you need it,
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and you'll remove it when you don't need it.
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Using this model, you can very closely
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follow the resource demand that is generated by
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your customers and spend money only when you
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need to actually spend
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that money or satisfy customer needs.
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This is in contrast to
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the capital expenditure model where you have,
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for example, in this particular case,
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unused resources that are sitting idle.
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