• Free for qualified executives and consultants to industry

  • Receive quarterly issues of Area Development Magazine and special market report and directory issues


Avoid Costly Data Center Blunders

Investors, operators, and end-users alike must identify true costs and investigate available options before committing to a new or existing strategy in the rapidly evolving data center industry.

Data Centers 2018
Advancements in the data center industry have profited seller and user alike over the past decade. The drive to process, transport, and store data more efficiently has given rise to technology with remarkable capabilities and enormous capacity. Society at large has benefitted from this rapid evolution, as have many of the investors that have fostered innovation or moved improvements from concept to market application.

As with progress in most high-growth technologies, the data management learning curve can be painful for those who view it through too narrow a lens. In a field where even insiders can quickly fall behind on the newest products and practices, it is incumbent on firms considering a change in data management strategy to approach the matter systematically and to guard against common, and potentially costly, pitfalls.

What follows is a rundown of missteps to avoid and points to consider in preparation for an investment in data management, whether as a developer contemplating a new facility, an investor looking to buy or sell, or an end-user evaluating the many data hosting options available.

Considerations for Investors and Operators
It is paramount that those interested in developing, acquiring, or operating a data center craft a clear business plan before making any significant expenditure. This may seem an obvious point, but the sad truth is that many eager developers have charged forward after insufficient preparations that ultimately led to failure.

“Build it and they will come” is a dangerous strategy that has trapped many data center developers. A smarter, safer approach is to first work out how the asset will be positioned, how it will operate, and who will run the facility. Tenants will require answers to those questions before signing a lease, which underscores the importance of defining the product offering from the outset.

Successful facilities tend to host business-critical applications for their customers. Positioning the data center to capture customers, therefore, requires a level of security and safeguards sufficient to assuage their fears. For example, in addition to physical security against entry by unauthorized personnel, tenants will expect the property to have backup generators and multiple power and data feeds to the site to support uninterrupted operations if electricity or data service from an outside provider fails. Is the building built to withstand earthquakes? How does the fire-suppression system work, and how does it reduce the risk of damage to equipment when deployed?

The most common misstep that data center users make is to overestimate the space, power, and cooling infrastructure needed. Potential customers will heavily scrutinize any potential technical or business risk. A facility that does not have a rock-solid narrative detailing long-term security measures in all aspects will be immediately rejected from consideration by potential users in preference for options that are deemed safer plays. v Successful facilities that already have sizeable customer bases tend to have “service ecosystems,” or an assortment of service providers with a connection to the facility, that have developed over time. This means that new customers have immediate, local access to a wide variety of services they may need now or in the future, including telecom carriers, information technology (IT) service providers, or vendors specific to their organization’s infrastructure. It is economically unfeasible to create this type of ecosystem from the outset as retained service providers, since the nature of the model is that all within it are rent-paying tenants. This part of the data center’s marketable features will develop organically from the leasing program.

For investors keen on avoiding the previously discussed pitfalls by purchasing an existing, revenue-generating data center, the path can be just as perilous. Before taking over any existing rent or service revenue stream, a potential buyer or investor needs full clarity of not only current profitability but also of how the asset’s revenue likely projects into the future, given the specific developments within the market.

In most major markets, the evolution of data center services has compressed prices over the past decade. Each year has introduced consistently higher-quality product and service access at a lower incremental cost, to the point that only strong, high-growth providers are able to thrive.

Even for companies that specialize in this field, forecasting can be a challenge. It’s a good idea to consult with experts in the operations and financial aspects of data center services when contemplating an investment in this asset type.

Advice for Data Center Users
While data center services have continued to improve in both quality and affordability, many organizations carry significant baggage in their current data center platforms that hinder them from taking full advantage of the options available.

Prior to the rise of data centers owned and operated by third-party providers, which is the predominant form today, organizations had no choice but to build and operate their own, private data center facilities. Self-hosting is becoming less common, particularly in major metropolitan areas. Many firms still use their own facilities for this purpose, however, especially when current assets have not reached the end of their useful life.

A facility that does not have a rock-solid narrative detailing long-term security measures in all aspects will be immediately rejected from consideration by potential users in preference for options that are deemed safer plays. Unfortunately, rapid industry advancements since the construction of these properties mean that most legacy facilities are less efficient and less reliable than the industry standard today. In many cases, owner-occupied data centers are also far larger than necessary. The operating expense on these facilities often exceeds the total cost of outsourcing the requirements altogether, which would bring the added advantages that come with up-to-date technology.

If an organization is considering a change to a new, private data center — whether that be new construction or retrofitting an existing facility — it should carefully calculate the total cost of ownership under that scenario and compare it to available outsourcing options. As noted earlier, the affordability and cost of outsourcing options have only improved in recent years. Perhaps more importantly, the need for on-premises electronic storage has dramatically receded along with the cost of transporting data, which has plummeted by approximately 35 percent each year. This enables organizations to use external facilities to serve their users without having to keep the data in the same location with the users themselves.

What about organizations that have decided to vacate their private facility, yet wish to maintain control of their IT infrastructure (servers, storage devices, network devices)? Those firms should take the time to truly understand how the organization’s requirements relate to the IT infrastructure it will ultimately place in outsourced facilities.

The most common misstep that data center users make is to overestimate the space, power, and cooling infrastructure needed. Depending on the type of agreement the firm makes with the facility’s operator, this miscalculation of needs may lead to significant overpayments over several years. By right-sizing requirements from the start and including flexibility for growth within the contract with the service provider, the organization maximizes the benefits of outsourcing.

Understanding application criticality is another important consideration that should be an ongoing process. This is especially true for large organizations with many IT applications that support its internal and external users. All applications are not equally critical or sensitive to disruption. In mapping IT infrastructure needs and the underlying facilities that support them, identify which programs need more investment in redundancy and overall resiliency. Treating all applications the same tends to lead to a lack of investment in supporting the most critical elements.

Organizations already bound by outsourcing agreements should review them on a regular basis for comparison against current market conditions. Companies undertaking this analysis for the first time frequently discover that their contract cost exceeds similar offerings in the market by 300 percent or more. The good news is that data center service contract structures and pricing have become significantly more favorable to end-users in almost all cases.

In Sum
Investors, operators, and end-users alike should resist the impulse to oversimplify the data center market. Before committing to a new strategy or assuming that an existing solution is best, confer with industry experts, identify true costs, and investigate available options in this rapidly evolving industry. The investment in time and research may well reveal an opportunity to right-size operations, access better services for the organization and its clients, or reduce costs. In many cases, it is possible to achieve all of these outcomes simultaneously.

Exclusive Research