TCO Analysis May Favor Owning vs. Outsourcing, but there’s More to the Data Center Story

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As businesses grow, their IT requirements often grow with them – eventually forcing the need for more data center capacity.  At that point, companies face a decision: build capacity within a new or existing facility that they own and operate, or outsource to a colocation facility.

In a white paper that I wrote with Kevin Brown, we examined both quantitative and qualitative factors that influence the decision.  We found that, although the financial metrics are important, they are sometimes overwhelmed by factors such as deployment timeframe, life expectancy, expertise level, cash flow preferences, and other strategic factors.

The financial model for owning your own data center and outsourcing to a colocation provider differ quite a bit.  In the paper, we step through a cost analysis of 3 upgrade and 1 build scenario vs. colocation.  Capacity upgrades can range from simple airflow improvements (like adding blanking panels, brush strips, and aisle containment), to adding pods of air or power distribution capacity in the IT space, to adding bulk power or cooling capacity.  The TCO analyses of these upgrades estimated a savings of 30% to 60% over colocation, with cash cross-over points of 1-3 years, depending on the upgrade scope.  The TCO analysis of building a new data center estimated a 20% savings over outsourcing, with a cash cross-over point of 5 years.  Some of the key cost drivers include rack density (higher density = higher cost per rack, but fewer racks), the bandwidth cost (colo providers generally have more available and lower cost options for bandwidth), and cost of capital (as cost of capital increases, TCO difference between the 2 approaches decreases).

Keep in mind, there are a lot variables that influence the comparison.  You can see our detailed results and assumptions in the appendices of the paper; or better yet, try out our cost model with our TradeOff Tool, Data Center Build vs. Colocation TCO Calculator, and use your own assumptions.

But remember TCO is only half the story.  Cash flow preference is another consideration, as some companies have a strong preference to steady, predictable expenses, regardless of TCO.  In the paper, we also discuss 10 strategic factors that should be considered in order to make a complete, well-informed decision.  Deployment timeframe is one of those factors.  If the business has a requirement to deploy new IT equipment in weeks, building a new data center is not a likely possibility.  Critical facilities expertise is another factor.  Some businesses may have sufficient facilities resources available and want to maintain “control”, while others view colocation facilities as operating with a higher level of availability and efficiency, since running data centers is their core business.  The paper provides a sample scorecard as a means of putting some structure to evaluating the strategic factors.

Check out the white paper (number 171), “Considerations for Owning versus Outsourcing Data Center Physical Infrastructure,” to learn how all of these considerations play into the build vs. outsource decision.

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