IT Focus Area: Financial
April 3, 2015
A New Approach to Financing Your Data Center
The tortoise would never beat the hare in a race today. Slow and steady will not get organizations ahead when it comes to financing data center infrastructure.
The rapid pace of technology is shortening the lifecycles of hardware and software. In order to keep up, financing should adapt to changes in IT management. Companies should take the proper steps now to avoid financial roadblocks as enterprise IT departments move toward the modern hybrid data center model.
With the many options that exist today – like on-premise data centers, off-premise data centers, private cloud, public cloud, hybrid (private-public) cloud and legacy systems – a hybrid model allows companies to customize its operations to meet both business and financial needs. Why settle for one limited option that does not provide benefits for all, or most, aspects of the business?
Organizations have more flexibility and options than ever before, meaning they should evaluate their options with great care. It is crucial to take a few major factors into account in order to gain maximum benefits from their data center facilities, the management of their IT environment, and optimizing their hardware/software.
Companies tend to continuously adopt familiar approaches, but traditional sourcing and funding models don’t necessarily align with the new realties. Therefore, it is foolhardy to trust that they still offer the most cost-effective solution.
The Changing Landscape of Data Centers
Depending on a company’s size, it may no longer make financial sense to build a data center from the ground up. Forrester Research estimates it costs roughly $200 per square foot to build this specialized type of facility on an existing property, according to their report, “Build or Buy? The Economics of Data Center Facilities.”
“We applied Forrester's Total Economic Impact™ (TEI) analysis to a generalized facility starting at 500 kilowatts (kW) with an annual IT power consumption growth rate of 10 percent and found that, while modularly built data centers are more economical than their traditional counterparts, leasing is still the lowest-risk solution for many organizations,” Forrester concluded in its report, “Build Or Collocate? The ROI Of Your Next Data Center.”
This is one of the compelling reasons why leasing is gaining traction with major organizations. North American companies leased 37 percent more wholesale data center space in 2014 than in 2013, according to data center real estate firm North American Data Centers.
“Across the spectrum of industries from health care to financial services, CIOs and their contemporaries are generally making a move away from data centers. Specifically, moving away from managing their own dedicated corporate data centers,” Gigaom Research analyst Tim Crawford wrote in November of 2014. “…While colocation facilities are seeing an uptick in interest, the momentum is only now starting to build.”
Colocation data center facilities can provide game-changing opportunities to consolidate data centers, taking advantage of monthly fee structures and reduced hardware, energy, staff and operating costs. Combined with strategically timing application lifecycles to hardware refreshes and contract dates, delegating these responsibilities is a step toward a more agile, cost-effective business model.
A Hands-Off Approach to Assets
The sheer volume of existing IT assets that companies currently house in their data centers can seem overwhelming, regardless of each organization’s future plans for facilities. Many of the assets are likely old, outdated and in need of an IT refresh to continue properly supporting the business. Some companies tend to falsely assume that leasing data center equipment is not as effective as purchasing the assets themselves.
The numbers, however, do not lie.
A $1 million IT investment, for example, depreciates 25 percent each year over four years. At the end of the third year, it has a remaining book value of $250,000 for year four and the maintenance could be $100,000 totaling $350,000 annually. Due to Moore’s Law, a replacement technology could cost approximately $550,000 and require half of the space and power. If you modify your approach and utilize leasing to more accurately reflect the productive life of the asset, say three years the expense would be $183,000 versus $350,000 for the inefficient asset identified above. This process can be repeated on a regular basis continuing to drive IT costs down.
This scenario has become the norm rather than the exception.
The useful life of IT assets, along with associated application life cycles, has experienced a steep decline — resulting in an accelerated depreciation and reduced resale values.
As technology changes rapidly, companies’ view on data center financing should shift accordingly. This is especially true for internal data center assets. Historically, it was safe to assume that hardware and software useful lives would remain somewhat stable over a predictable period. However, recent shifts in computing have introduced a new reality that dictates a corresponding shift in data center asset financing as a formula for success.
Unfortunately, when it comes to data centers, there tends to be very little focus on the best way to invest in the underlying technology. Organizations should not overlook this important piece, nor regard colocations as merely an extension of a data center. Today, companies require a 360 degree view of the entire process. Conducting a thorough analysis includes re-evaluating the most cost effective way to acquire equipment, addressing all of the pros and cons.
Businesses should work to draft a well-structured financial contract that aligns with the expected life and need for applications, as well as the associated infrastructure. There are a number of different scenarios for sourcing the equipment in a colocation facility.
In the first case, providers buy equipment on the client’s behalf, which gives the colocation providers no incentive to update the equipment and leaves the client without leverage to force a refresh. Then there are organizations that buy their own assets. While this is a perfectly plausible option, it sometimes leaves companies with assets stranded in the facility at the end of the contract. Both of these scenarios make a subsequent move to a better option difficult and expensive.
On the other hand, acquiring assets under a lease that is suitable for the expected term of the contract and/or the expected life of the applications gives the client more control and an opportunity to reduce costs over time. For example, when a company refreshes its IT assets, it gains the ability to negotiate a much lower contract if the amount of capacity required by applications remains stable. As a result, organizations can significantly reduce their footprint, power consumption and associated costs.
Conclusion: Flexibility is the New World
Cloud and colocation services offer a new dimension of location and management for applications. However, it is important to keep in mind that flexibility is critical when it comes to implementing these services. Many companies can borrow from multiple models, finding the mix that is most beneficial to their business. It’s all about using pieces of the puzzle that work best for you.
Colocation data center facilities can provide a path to cost reduction, but there isn’t just one way to align IT with finances. At the end of the day, the main goal is to cultivate enhanced flexibility and lower costs. Organizations should evaluate physical location, management services and the underlying financing of infrastructure. Choosing the perfect blend of options will keep them ahead of the curve to reach the finish line first.