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o.k. shortish non-technical tweet thread this morning on capital Vs operational financial expenditure, because I only just learned a new way to think about it yesterday and it blew my mind. Maybe it's obvious to more, but it wasn't to me!
Since we first launched, one of AWS's biggest benefits has been that customers can trade many big capital expenses; building data centers, buying software licenses, and so on for operational expense. In general, AWS is pay for what you use, with monthly bill.
For a long time I've thought this is pretty simple. It's painful and wasteful to keep big chunks of money around and makes CFOs unhappy. Capital costs can be financed too, like buying a car, but there's an interest rate to pay and so the net-present-value cost is higher. Simple!
Now I knew that that model is too simple; there's also waste in capital expenses because depreciation models and amortization aren't perfect. Basically you might buy something, and it can become obsolescent and you never get all the years out of it you wanted, and can't sell it.
But what I didn't really "get" until yesterday is that many CFOs prefer operational expenses because they are structurally easier to lower than capital expenses. This was an "aha!" for me. Here's how it clicked ...
In general, when you have a big capital expense, like building a DC, it's a process that's bounded in time. A company might put a contract out for bid with suppliers, and they'll make their offers, and you pick one and you get on doing it.
but often things go over budget for unforeseen reasons, you can't just pause and litigate that too much, because there's time pressure too, and then the thing is delivered and you move on, and do another exercise a few years later.
Basically you get a limited number of high-stakes points at which you can try to save costs. If you did it often you might get good at it, but then it would be classed as an operational expense anyway, not a capital one.
Whereas with operational expenses: the organization can optimize costs on their own time, as and when the people or resources to do it are available. Wait for the quiet quarter, or whatever, do a "find some cost-savings" exercise, and make it stick as much as you can.
This is *structurally* much better way of doing business. Simple example: You can train people how to look for cost savings on an ongoing basis; not just hope you have the person who was around the last time we bid for a big contract, etc ...
I got all of this from a conversation with a CFO. Like I said, probably simple and obvious to many, but it wasn't to me. I never "got" that level to the whole thing, I thought it was just about budgetary math. But it makes total sense. End-of-thread!
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