Tuesday, January 4, 2011

Returns on Capital Expenditures vs. Capex Reductions

By David Gross

Just about every IT, networking, power, and cooling vendor serving this industry promises to both "reduce capex and opex".   But these goals are often meaningless, especially in the case of capital budgets, which often require board approval, and are set for the year.   Moreover, the number one objective of a capital investment is to get the highest possible return, as measured by IRR, not to spend less than you did during the last upgrade cycle. And in the case of opex, it's very easy, and very common, for salespeople to make spreadsheets showing big opex reductions that are not always achievable in practice, especially when most data centers are already very capital-intensive and highly automated.

Far more attention getting than droning on about opex, capex, ROI, and TCO like the herd, is to focus on more specific financial metrics that your product can improve upon.   IRR and NPV are good places to start.  Because most sales presentations confuse payback period with ROI, have no time value of money, and do a poor job showing tradeoffs, they have limited credibility.   IRR, which in my experience is known by some, but not all sales and marketing people, is the most important metric for any capital investment.    While it might take some education to explain what it represents to some buyers, if all the community college students taking introductory finance courses can learn it, I'm sure the CIO you're selling to can as well.

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