In this economic climate, should IT managers build or buy data center space? What are the metrics execs should consider when weighing their options? Simon Tusha, former Google data center exec and CTO of Overland Park, Kan.-based colocation firm Quality Technology Services (QTS), along with QTS COO Brian Johnston, weigh in on data center outsourcing trends in this Q&A.
First off, the most obvious question deals with the build vs. buy debate. There are probably a lot of factors that go into each option, but what are the metrics IT managers should use when deciding whether to build or rent a data center?
Some of the metrics include:
1. What is the business’ cost of capital?
2. What are the business’ ROI targets?
3. Does the IT capital budget meet or exceed the companies’ ROI?
4. IT Managers need to put on a CFO cap and protect companies’ liquidity
5. Is data center operation revenue generating to the business or simply service?
The primary means of evaluating any outsourced IT arrangement, including data centers, is twofold: does the company have the necessary skill set and can it afford the capital outlay to undertake its own build-out? Basically, considerations of capital expense – the balance sheet – as well as core competencies are critical.
First, consider the economics. It costs at least $10-15 million per megawatt to build a state-of-the-art data center. And for some constructions, it is significantly more than that. But when you get up to 30 MW or more, the cost of each additional megawatt drops to about $4 million. So the largest data centers are extraordinarily efficient and therefore enjoy a big edge in economics over their smaller counterparts. With access to capital and liquidity being more of an issue for companies than ever before, it doesn’t make very good business sense to consume financial resources in building a small data center that will rapidly be outgrown as your business scales or is rendered obsolete as power density continues to grow. Quite simply, efficiency and economies of scale benefit larger megawatt deployments. Major players in this market see this, and that’s why they are moving to outsourced facilities if they are not consuming at least 20-30 MW of power. Additionally, building a new data center from the ground up requires huge capital outlay. From a balance sheet perspective, most companies would rather shift from a major capital outlay that affects the balance sheet to a month-to-month operating expense to outsource the data center that has far less impact on the company’s bottom line.
Second, consider the issue of core competency. Customers increasingly understand the importance of outsourcing any business elements that are not core competencies — technology and particularly data centers are a niche topic, while outsourcing has grown rapidly. When customers consider the 24/7, 365 management of people, facilities, connectivity, power, cooling, and security, it quickly becomes evident that outsourcing such a facility and amortizing such costs over a wider variety of tenants in a multi-tenant facility is more economical, as well as more secure, resilient, redundant and reliable. So outsourced data center customers get better service at a more economical rate.
What are some of the stats on building and buying? Are there mixed building/leasing situations?
According to Frost & Sullivan, in 2010, 56% of the data center market is owned versus 44% leased. The percentages of owned space versus leased is growing closer, with 60% owned in 2009 versus 40% leased. By 2012, it is estimated that owned and leased space will be equal.
Is colocation a “launching pad” of sorts – do companies start from third-party space and work their way up to constructing their own data centers, or do you find that even huge companies have a need for leased space?
I do not think colocation is necessarily a launching pad of sorts — even large multi-national corporations may evaluate their economic needs and core competencies, and decide that outsourcing is the most efficient use of money, making it their primary means of infrastructure hosting. It really comes down to each company’s initial evaluation of what is most important to their business, what the tolerance for outsourcing non-core competencies is, and what’s most economically sound.
For smaller implementations that require less than 20-25 MW of power, regardless of the size of the company requiring the installation, colocation is typically the most economical choice. For data center installations requiring more than 25 MW, most companies will consider their own builds.
Has the economy forced a lot of people to colocate when they otherwise would have built? Do you see colocation growth in decline over the next decade with an economic rebound?
While the economic decline certainly helped data center businesses as companies were forced to do more with less and optimize their resources as a result, what’s nice about the data center market is that it is somewhat recession-resilient. With corporate technological needs outpacing the growth of data center capacity, the increasing acceptance of IT outsourcing industry-wide, and the clear business efficiencies that outsourcing the data center provides – whether for custom data centers, colocation or cloud computing – the data center market is becoming more and more relevant to customers. In hard economic times, businesses look to the data center to help cut costs by outsourcing non-core business competencies. In stronger economic times, businesses often experience growth that requires additional infrastructure, and infrastructure may also be added to support product differentiation or new corporate offerings. So regardless of economic conditions, there are strong value propositions to outsourcing within a highly secure and scalable outsourced data center.