Demystifying the Data Center Sourcing Dilemma - February 2015

Laura Cunningham is a business consultant with HP Technology Consulting, building financial business cases for CIOs and CFOs.

A growing number of companies are faced with the decision of what to do with aging data centers and increasing IT requirements for data center provisions. There are a spectrum of sourcing options to consider when selecting a data center including retrofit, greenfield, modular, and colocation. While each option has advantages and disadvantages, variables such as size, location, and investment strategy are key components that influence which solution is the best fit.

The following examines data center sourcing from the data center facilities perspective, including building shell and core, maintaining, and operating the facility, power, and cooling. For the sake of comparison, it is assumed that the availability, resiliency or “tier” level of the data center is the same across sourcing options.

The options considered include retrofit, upgrades done to an existing data center; greenfield, the purchase of or construction of a data center; modular, a pre-fabricated data center; and colocation, a service provider leasing data center space. Managed services and cloud are considered along the same spectrum as colocation in this article since they are essentially varying degrees of providing data center as a service.

Data Center Capacity Needs

When you’re considering a data center solution, one of the driving factors is the IT equivalent of “space”, kW capacity. The long-term kW capacity requirements and the ongoing variability of kW requirements have the largest impact on a recommended data center solution. Typically short-term and highly variable capacity needs are often best accommodated by colocation, managed service, and cloud as these are highly scalable. Long-term data center capacity needs are often best accommodated by retrofit and greenfield sourcing options as these are more permanent solutions. Modular can accommodate somewhere in between as it provides the opportunity to relatively quickly add capacity in phases when needed. The trick is to forecast the kW requirements over time in order to find the best data center solution.

In regard to the sourcing spectrum, for a retrofit, greenfield, or modular solution, the sooner secured capacity is reached and utilized, the faster the payoff period of the investment. However, the financial risk for these is overbuilding and spending more than necessary on unused capacity. In comparison, colocation provides for variability as it charges rent and power for what is actually used (excluding any charges for reserved adjacency expansion space).

In the end, a combination of solutions may be necessary to accommodate fluctuating business cycles and the highs and lows in capacity requirements. The goal is to find the middle ground of investing in forecasted capacity requirements while utilizing a service provider to accommodate requirements above that amount.

Location is Everything

What is true in real-estate investment holds true for data centers: location is everything. First, from a financial perspective, land prices, construction costs, service providers, and financial incentives greatly vary based on location, and this can impact any of the data center sourcing options.

Additionally, latency requirements, the time between the moment a signal is sent and when that signal is received, will also drive the location requirements. This is especially true for financial services that need to have low latency connections to the stock exchanges. Proximity hosting, a service offered by colocation providers, is popular with many companies that want the ability to interconnect to the exchanges.

Further, for many businesses it is important to secure a data center near existing operations. This enables them to leverage trained personnel and to maintain market presence in that region. Disaster recovery requirements affect the location parameters, as being a specific distance away from other data centers is recommended based on the industry and best practices.

Finally, it is most cost beneficial for retrofit, greenfield, and modular options to leverage land or buildings in the company’s existing real-estate portfolio.

What is Your Investment Strategy?

A huge differentiator between data center sourcing is a company’s investment strategy. Does your company prefer to own or lease facilities? Each data center sourcing option varies greatly on the ratio of capital expenditure (CAPEX) vs operating expenditure (OPEX) required.

Retrofit, greenfield, and modular solutions are typically owned and classified as an asset on the balance sheet, and therefore require the largest initial CAPEX. Colocation, managed service, and cloud tend to be OPEX-centric, thereby needing low to no initial CAPEX. Owning a data center makes more sense to businesses that have or can obtain capital and want to maintain lower OPEX. Leasing a data center makes more sense to businesses that need to conserve capital and are OPEX-neutral.

Financial calculations should be utilized when determining the right financial fit for your company. Total Cost of Ownership (TCO) is a calculation widely used to compare the cost of different data center sourcing options. In addition, Net Present Value (NPV) should be calculated to evaluate the present value of future cash flows for each data center option. Both calculations vary greatly on the time period considered. Retrofit, greenfield, and modular are typically more expensive options in the short term due to the large amount of initial CAPEX. Colocation is typically more expensive over the long term as recurring annual expenses, OPEX can surpass the cost of the prior three options.

Ownership and appetite for control will set data center sourcing options apart. Greenfield, retrofit, and modular solutions are best for companies that desire ownership and control over the data center and daily operations. Colocation, managed service, and cloud are generally preferred by companies that wish to outsource the data center facility operations and manage control by ensuring the correct Service Level Agreement (SLA) is in place.

In conclusion, evaluating size, location, and investment strategy will help you narrow in on the data center solution that is right for your business.

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