Typically when we spend for computer infrastructure, we spend our CapEx dollars according to the investment priorities for the current fiscal year.      When we want to show what is cost to run the business, we typically show the OpEx, which includes the previous year’s depreciation of capital expenditures.  So, our CapEx and OpEx numbers seem disconnected as it is hard to understand the mapping between them, in terms of investment priorities.    I’m looking for a graceful way to combine these two concepts so that the management can see the total investment in a particular area.  And, a graceful way to explain the concepts.  Any ideas?

Mike,

Not sure if anyone has synced with you to answer this question (like @Diane Kitano), but it's a common one with our customers. One of the concepts that is available in many reports in the newer versions of Apptio (which I believe you are on) is RtB (Run the Business) and Gtb/CtB (Grow / Change / Transform the business) costs.

This concept seems to translate well for many customers in showing the costs to their management. What you are able to say is the total cost outlay to support this technology is the mix of RtB and GtB. If you are moving away from a technology stack you should be able to see the prioritization via lower GtB (and hopefully decreasing RtB as well).

If this concept sounds like it would gel well with your users we should look at what it would take to integrate it into your reporting.

Mike,

Great question, but it doesn’t have a simple or consistent answer because it is highly dependent on how CapEx, and Depreciation/Amortization (D/A) expenses are coded in your GL.  In a simple example, when CapEx dollars are spent, those expenditures are associated with a Project; that Project creates or enhances an Application or Service, which is an asset from a financial perspective. Therefore, visibility is established for a consumer of the App or Service into the CapEx spend.  Since you could tag a Project as Run-the-Business (RtB) or Change-the-Business (CtB) or any other “XtB” scheme you want, as well as tagging by Business Initiative, it’s straightforward to show the alignment of CapEx spend to business priorities.  And by the wording of your question you already know that.

Your accounting procedures will already be set up to start recording the D/A of the asset that was created/enhanced by the project; that D/A will end up as one or more OpEx journal entries in the GL.  And there’s where the disconnect occurs.  Some organizations have a single monthly D/A journal entry which makes it virtually impossible to allocate those expenses in a meaningful way without some other sources of data or by making some major assumptions.  But the more granularity that is included with the D/A journal entries, the clearer the picture you can provide.  For example, if your accounting system captures a project or app/asset identifier in the D/A journal entry, you can use that information to allocate the D/A expense directly to the app/asset and can report on the D/A as part of the App’s Run cost. 

The picture becomes more complicated for non-Project specific CapEx (although the out of the box Apptio CapEx model encourages all CapEx to be associated with a Project) but if you can link server hardware, for example, to an app and the D/A to the server HW (either individually or even en masse) you can allocate the server D/A to the Run cost of the app. 

The best case would be to be able to associate every CapEx dollar with a resource (labor, server, SW, etc.), the resource to an app or service, and the D/A entry to the app/service either directly or via assignment (e.g., app runs on server, SW package is shared by apps, etc.).  There are also accounting techniques for making life easier, like treating different CapEx on the same app or service as a group asset that starts to depreciate all of the spend together once the app (asset) has been put into service. 

Absolute accuracy requires a lot of well-kept data so inevitably assumptions will need to be made but at least you are on the path for reflecting D/A in App Run costs and in so doing you are connecting the dots between the CapEx spend on an App and the D/A impact on its run costs in future periods. 

Hope that helps some, and I’d be interested to hear about how others have handled this.

Thanks Craig and Andrew for your comments.  I will follow up on them.

Mike,

Not wanting to take anything away from Andrew's post.  His post is cool.

In a previous life I presented a CASH budget to management.  Showed the possible cash spend from all the projects / capital investment as an overlay to the OPEX budget.  (Once the non-cash elements were removed)

It helped the guys in the Treasury understand what we were doing when building data centers and buying big pieces of kit.  They really like this as it help their investment strategy.

A cash budget was reasonably easy as OPEX is the killer number and from the CAPEX number you could derive the expected depreciation / amortization impact (showing existing rundown against increases from new purchases)

Hope this helps,

Tim