Build, Buy or Lease?

BUILD, BUY OR LEASE? CHOOSING THE BEST OPTION FOR YOUR NEXT DATA CENTRE

Build, Buy or Lease? Choosing the Best Option for Your Next Data Centre

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TABLE OF CONTENTS 3 INTRODUCTION 4 THE DATA CENTRE DRIVE 6 11 THINGS TO CONSIDER 12 NO EASY ANSWER, BUT MANY CHOICES 12 ABOUT DFT

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INTRODUCTION

Due to unprecedented demand for compute and data storage resources, modern data centres have become indispensable to many organizations. According to Cisco’s Global Cloud Index, by 2019, 86 percent of workloads will be processed by cloud data centres. Annual global data centre IP traffic will reach 10.4 zettabytes by the end of 2019, up from 3.4 zettabytes per year in 2014.1 The explosive growth of mobile, social media, Software as a Service (SaaS), Infrastructure as a Service (IaaS) and cloud-intensive applications has helped spur this unprecedented data centre demand. Along with the increase in demand comes the inevitable question: “Is it better to build, buy or lease a data centre?”

The answer depends on many different factors and considerations, ranging from the size of a company’s deployment (how much power is required to support the IT equipment), to its connectivity needs, security and location requirements, financial considerations and more. Each organization will have its own set of needs and criteria that will help determine whether building, buying or leasing – or perhaps some combination of the three options – is best.

The chart below outlines the operational benefits of both building and leasing data centre space.

This white paper will examine the build/buy/lease dilemma from a few perspectives: •

It will provide an overview of the driving factors behind data centre needs, including economical and business issues, data demands, real estate considerations and more.

•

It will delve into 11 key items that all companies should consider when exploring their building, buying and leasing options. These include: o

Deployment size

o

o

Equipment needs

o Scalability

o Timing o Connectivity o

Security and regulations

o

Redundancy and availability

o

Location and distance Subject matter expertise

o Environmental considerations o

Budget (CAPEX and OPEX)

Cisco, Global Cloud Index: Forecast and Methodology, 2014 – 2019 White Paper, 2016, http://www.cisco.com/c/en/us/solutions/collateral/service-provider/global-cloud-index-gci/Cloud_Index_White_Paper.html 1

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The intended audience for this white paper consists of anyone involved in deciding whether to build, buy or lease a data centre, including: • • • • •

Vice Presidents of Operations Vice Presidents of Finance Chief Information Officers Chief Technology Officers Chief Financial Officers

THE DATA CENTRE DRIVE “END USERS ARE ACCELERATING THE PACE OF MIGRATION OF THEIR MISSION-CRITICAL IT INFRASTRUCTURE OUT OF DATED, CORPORATE ENTERPRISE DATA CENTRES. SAVVY BUSINESSES ARE CHOOSING HYBRID CLOUD SOLUTIONS (BOTH PUBLIC AND PRIVATE) AND PURPOSE-BUILT COMMERCIAL-GRADE COLOCATION FACILITIES. SECURITY, DATA SOVEREIGNTY, COST CONTAINMENT AND FLEXIBILITY ARE THE KEY FACTORS DRIVING COMPANIES TO LEASE COLOCATION SPACE AND RE-FOCUS THEIR EFFORTS ON THEIR CORE BUSINESS.” SCOTT METCALFE, VP DATA CENTRE SOLUTIONS, JLL

By 2019, 56 percent of cloud workloads will be in public cloud data centres, up from 30 percent in 2014 (CAGR of 44 percent from 2014 to 2019).1

By 2019, 44 percent of cloud workloads will be in private data centres, down from 70 percent in 2014 (CAGR of 16 percent from 2014 to 2019).1

Traditionally, many corporate executives sought to mitigate risk by outsourcing their IT environments to managed services consultants. However, recent trends show that increasing numbers of companies are doing away with this step altogether. They’ve chosen to focus their efforts on their core lines of business, rather than having their company be an IT shop or data centre, which is not a viable or appropriate business model for many organizations. As such, they’re going straight from enterprise systems to the cloud.

This “cloud-first” approach is a primary driving factor behind rapidly rising data centre demand. Managers are streamlining their businesses by way of the cloud. An increasing number of companies are hosting applications, particularly in the public cloud, wherein enterprises are using the public Internet to deliver their software and applications to the end user.

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Thirdparty research conducted by Moziac Group, March - April 2016

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Many organizations are also looking to streamline their physical operations as well through space savings in offices and other facilities. In particular, some larger companies are choosing to repurpose portions of their real estate portfolios that have traditionally been used to house IT equipment. They’re moving equipment from those facilities offsite and into data centres, and using the extra space to house their most valuable assets: employees.

Streamlining comes with considerations and potential costs, and executives must dig deep to answer some challenging questions. How soon do they need the data centre to become available? How much control do they want to be able exercise over the facility? What type of equipment do they need? What does their budget allow for? Are they more comfortable with a CAPEX or OPEX approach? Every company will address these questions differently, and there are no wrong answers.

But there can be wrong choices. Executives must be careful to not lock their organizations into a data centre agreement that does not suit their needs – contractually, technologically and financially. Decision-makers must weigh their choices carefully. To do that, they need to understand the various pros and cons associated with building, buying and leasing.

Eleven key factors outlined in this white paper are an excellent place to start.

Examining each of these can provide perspective on the benefits and drawbacks of building, buying and leasing – and help executives determine which option, or combination of options, may be better suited to meet their unique needs.

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Third-party research conducted by Moziac Group, March - April 2016

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11 THINGS TO CONSIDER DEPLOYMENT SIZE Leasing can be the right choice for companies with deployments of all sizes. Leased facilities allow organizations to leverage common infrastructures. For example, many leased facilities will come complete with shared chiller plants for temperature control. Many companies will likely find it economically impossible to build their own facilities with this level of infrastructure and equipment. Leasing provides access to technologies, infrastructures and methodologies that may otherwise be prohibitively expensive.

It’s also important to note that large, multi-tenant data centre facilities have the ability to reduce cost overall because they can accommodate many customers under one roof. Customers may share in cost savings since facility expenses are shared among all tenants. This is a turnkey data centre outsourcing solution.

However, organizations with lease deployments, for example, of greater than 10 megawatts (MW) may wish to consider building a custom data centre to meet their needs. These organizations will likely need more space than a leased facility – particularly one with other tenants – can provide. They may also want to have a say in choosing technologies for delivery of power and cooling, as well as general construction. These larger than 10MW requirements can be driven by data centre providers as a “Build-To-Suit” requirement wherein the customer provides their specific design requirements for the mechanical and electrical, and the data centre provider designs (with input from the customer) and builds the data centre for that one customer.

EQUIPMENT NEEDS The type of equipment a company uses can have a significant impact on the build/buy/lease decision. Newer equipment may translate into higher power consumption, or greater power density within the space, which could also result in cooling challenges. Some leased data centres may not be configured to handle this type of power density. The question executives should ask is, “How much power per square foot do we need?” It’s an important point that needs to be analyzed before any decision is made because the power per square foot directly drives the overall investment for the customer when they are evaluating the total cost of ownership on the outsourced model.

It is also important to consider equipment weight and the types of cabinets that will be needed to house the solutions. For example, heavy and densely populated cabinets of blade servers need reinforced floors, and networking and storage equipment may require certain cabinet sizes. It may be more challenging to find the ideal fit in a leased or purchased space, whereas a newly constructed data centre can be customized to suit these specifications and requirements.

Organizations with high-performance computing need modern data centres that can successfully house high-speed equipment. Often that may entail exploring the benefits of building or purchasing a newer data centre that might be more accommodating to an organization’s emerging technology needs.

That’s not to say that leasing cannot work in this situation. But, executives will want to take into account their power and processing needs and make sure that the leased data centre can handle those just as well as a custom-built or newer facility.

A final characteristic to consider is the cost, time and expertise to maintain data centre equipment. In a leased environment, the data centre provider has sole responsibility for the equipment, and costs are shared among the tenants. On the other hand, if an organization owns a data centre, that organization is responsible for the maintenance of equipment and the associated costs of the building staff.

TIMING Timing is often one of the key driving factors behind a company’s decision to build, buy or lease its data centre. Each option has its own lead-time, ranging from weeks to potentially years.

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Leasing – Shortest Time Frame, Least Customization and Control Leasing is by far the best option for organizations that need to be up and running quickly. The building already exists. A company simply needs to reach an agreement on terms, sign the lease and move in. This can be done in the shortest amount of time and allows for the quickest return on investment. Leasing is also ideal for companies that may be experiencing phenomenal growth and may need to easily add additional capacity within a few months. Companies may not get the same level of customization and control they would from buying or building, but they will be able to rapidly become operational.

Buying – Shorter Time Frame, Some Customization, Full Control Buying offers similar time benefits to leasing, although the turnaround time may not be quite as quick as leasing. First, there might be competitive offers on the space, and even after terms are agreed upon, there will be the matter of finalizing the transaction, both legally and financially. Owners will be able to make the data centre their own, and customize it to fit their needs (which might be more difficult in a leased space). However, it will still be a process – not as quick as leasing, but certainly not as arduous or time-consuming as building.

Building – Longest Time Frame, Complete Customization and Control Building a data centre generally takes anywhere from 12 to 24 months depending on the size, the permitting process and any vendor-related delays. Often, organizations will run into delyas, depending on the size, land acquisition, permitting process and lead times for equipment. For example, rotary UPS systems can typically take several weeks or months to procure and deliver. This type of schedule has to be taken into consideration, along with the usual roadblocks that will inevitably occur during the construction of any large-scale facility. Again, a built data centre will allow for greater customization and control – so, for some, it may be worth the wait.

CONNECTIVITY Each organization has its own connectivity needs. Some enterprises may require access to multiple network providers, while others may only need a particular operator.

In either case, it’s important for IT managers to ensure that their next data centre location offers the type of networks that will suit their businesses’ needs and budgets.

In general, leased facilities offer a greater number of options, including: •

An array of network providers. These providers are willing to work within leased facilities because they understand that they will be able to enjoy a certain amount of business due to the fact that they will be exposed to multiple customers. This gives enterprises the ability to take advantage of the network carrier’s shared equipment installed in the data centre’s telecommunications room and utilize any needed services.

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Access to dark fiber and Internet Exchanges (IXP). Dark fiber provides direct access to networks, either within a facility or across a data centre campus.

It allows for quick turn-ups of network services and features, which allows scalability, flexibility, reliability and low latency to be leveraged as long as needed.

IXPs enable the exchange of Internet traffic between Internet Service Providers (ISPs), telecommunications carriers, content providers, eyeball networks and other network providers in a transparent, cost-effective manner.

•

Cross-connectivity with other businesses and providers. Many leased data centres offer customers the ability to cross-connect with other businesses, partners or cloud providers. Multiple connectivity options can help organizations create a highly flexible and linked ecosystem fueled by low latency, reliability and performance.

Of course, enterprises can also incorporate network providers and services into custom built or purchased data centres, but this process can be costly and difficult to implement. Many network providers will only service a data centre if they can be assured they’ll receive enough of a return on investment to do so (the aforementioned “business density”). If executives choose to build or buy their own centre, they are able to bring any number of carriers they like into their facility – but they’ll be footing DFT DATA CENTERS

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the cost on their own because operators will not be able to sell their services to other companies as they would in a multi-tenant data centre.

SECURITY AND REGULATIONS Due to security and regulatory concerns, certain companies may perceive that building or purchasing their own data centres are the only real options. Companies that deal with sensitive or critical data, or that must adhere to specific regulatory standards, may have certain non-negotiable security standards they can only achieve through total control of the facility. For example, organizations within the healthcare or scientific research fields might be required to adhere to HIPAA privacy standards, which may be better achieved if the company owns the facility. However, these organizations must weigh the benefits of having complete control with the fact that they will need to assume all security costs, as well as the additional time it will take to deploy and manage their facilities.

That’s not to say that leased space does not come with a high level of security features. Leased data centres typically offer round-the-clock security details, the cost of which can be shared amongst all customers within the facility. Many providers will also offer additional services and options to accommodate special security and regulatory needs (for example, fencing in a computer room which separates a company’s technologies from the equipment of the data centre owner). Other times, data centre providers are able to work with customers to help them achieve their security and compliance requirements.

REDUNDANCY AND AVAILABILITY Today’s organizations need to be able to provide customers with continuous and seamless service. The choice of building, buying or leasing a data centre can be paramount to their efforts at redundancy and always-on availability.

Leased data centres generally offer Service Level Agreements (SLAs) to ensure that their operations provide reliable redundancy and availability to avoid business downtime. Executives who opt to lease their data centres can rest assured that the facility they are housing their IT assets in is well-equipped to provide contingencies in the event of a loss of power.

Some facilities are more hardened than others. Companies considering these facilities may build redundancy into the software or network architecture instead of copying data to multiple data centres and moving workloads between them. This is obviously a cheaper option than data centres that may offer more protection, but it may not be the best option for all organizations.

Those that need greater redundancy and business continuity assurances may wish to opt for highly redundant facilities. There are leasing options here, but the situation is the same as for organizations that need greater security. For them, the best way to ensure 24x7 availability may be to build or purchase their own data centres, which will allow complete control over solutions and services. In fact, as with security, this may be the preferred option for certain industries, particularly those that must comply with strict regulatory guidelines.

It’s also worth noting that each layer of redundancy is expensive to purchase and maintain. Data centre providers with multiple facilities will have more buying power and negotiating leverage, which is generally passed on to the customers leasing space in a wholesale model. Data centre providers may also offer flexible levels of power redundancy such as N, N+1, 2N, etc. so that customers can choose the right level of redundancy for their application.

LOCATION AND DISTANCE The choice of data centre location, including the distance from other data centres, is important to a company’s disaster recovery planning. Executives will typically wish to house their applications and data in centres that are far enough away from each other so that a catastrophe at one site will not impact the other. Some will compile blast and mileage radius analyses to judge where locations should exist. The preferred mileage may be anywhere from 30 to 100 miles apart—enough distance for personnel to be able to access the centres and still have them fairly separated.

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There are other factors that companies may want to consider. Some data centre locations will have better access to connectivity, while others may offer tax incentives and lower power rates (for example, a data centre in San Francisco will inevitably be much more expensive than one in Northern Virginia). Some companies may want a data centre that’s close to their corporate headquarters for easy access.

Data synchronization and replication (whether synchronous or asynchronous replication) also come into play. Some data systems are bound by distance constraints and can only do synchronous data replication within a certain distance radius. Executives who wish for their data to be available in real-time at more than one location may need to have multiple locations within a certain distance from each other. Again, this distance must be far enough away in case of an emergency, yet close enough for successful data replication.

Leasing may be more economical and offer better value for data replication.

Yes, building or buying offers greater control and the purchaser can choose the specific locations of the facilities. But they will also have to staff those facilities with engineering, technical and security personnel, pay for their maintenance and take the time to build or buy them. There are a lot of costs associated with building or buying for location – and those costs will almost always outweigh the conveniences.

SCALABILITY There’s been much written about businesses’ desire to become more agile and flexible so they can achieve greater scalability. That mentality is bleeding into the way many organizations are approaching their data centre needs. Many organizations need space now, but also need to maintain some level of flexibility in anticipation of future growth, which may happen within months, or perhaps even years.

Leasing will likely be the best option for these organizations, allowing them to easily expand and scale outside of their abilities to do so on their own. This is why many executives at cloud providers are leasing data centres as much – if not more – than they are building or buying them. These companies are moving so quickly they simply do not have the time to spend building or even attempting to purchase space. For them, “just-in-time” leasing is a better fit.

Executives at companies with a more stabilized growth trajectory may find building or buying to be more ideal. Scalability may be outweighed by the desire for complete control or security factors. Those who desire these features, and can estimate how much power and space they will need over the next several years, may wish to consider building or buying their data centres.

SUBJECT MATTER EXPERTISE Every data centre needs to be fully equipped, not only with technology, but with knowledgeable staff. Data centres require people on-site who can respond to problems and address daily maintenance concerns.

Some larger organizations may already have engineers, electricians and other subject matter experts on staff, and can simply bring staff into the data centre they’ve built or purchased. Typically, these organizations are large-scale operations where the cost associated with staffing is not as much of a factor.

Other companies may not have the necessary personnel needed to maintain a data centre. Executives at these organizations may want to consider leasing facilities that offer on-site subject matter experts who can respond if something breaks or becomes outdated and needs to be replaced. Unlike companies that use their own staff and must be solely responsible for salaries, benefits and other costs, organizations that choose leasing can split those costs with other customers if they are in a multi-tenant data centre.

ENVIRONMENTAL CONSIDERATIONS Sustainability is an important concern for many companies, yet some have more stringent environmental requirements than others. Companies that place a high priority on sustainability may want to consider building their own data centres.

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They will be able to gain complete control over their environmental efforts by installing energy-friendly temperature controls, designing systems that allow for the repurposing of outside air and water and more. For them, the benefits behind building and designing their own centres may outweigh the costs and time associated with construction and maintenance.

Executives at organizations that may not place as high of a premium on sustainability will want to maximize cost efficiencies while still maintaining some level of environmental standards. For them, leasing may prove an ideal solution. Many data centre owners have arrangements with local utility companies to ensure their centres are both environmentally-and budget-friendly. Customers using these facilities can rest assured that the data centres adhere to environmental standards while benefiting from lower electricity costs.

BUDGET (CAPEX AND OPEX) Readers of this white paper will notice that cost is a continuous and underlying theme.

Indeed, everything mentioned above has a direct impact on cost. For many, it will be the ultimate factor in the build/buy/lease decision.

For instance, if building is a consideration, executives must look beyond just their ability to access capital and the cost of construction itself. They must also understand what choosing to build might mean for income statements, balance sheets and company valuation. Building a facility becomes an asset on the balance sheet, so payments will be included as depreciation and interest. This type of capital expense (CAPEX) might be perfectly fine with some companies, but for others, it might be limiting. Subsequent to building, the fully loaded cost of operating the entire building should also be correctly considered, as the customer will be bearing the total cost of operations.

Triple net leases in a multi-tenant data centre can also help companies save on costs.

Triple net leases allow organizations to split data centre operating expenses (OPEX), including maintenance and security, with other customers. The larger the data centre, the lower the OPEX as fixed costs are spread out over more kilowatts (kWs) or square feet.

There is also the option of a full-service lease that offers a fixed rate that covers maintenance, security and more. The benefit here is predictability: customers are presented with a fixed financial obligation from year-to-year, with all costs fixed at the time of the lease signing (save for electrical, property taxes and insurance).

Neither of these options offers the benefit of the facility becoming an asset, but they effectively allow lease payments to be in stream across the life of a project, turning those payments into an OPEX. This may provide a more cost-effective solution that is consistent with the overall strategy of the organization’s IT budget.

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In this example, leasing has significant cost advantages—36% annual savings and flexibility at the end of the lease.

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NO EASY ANSWER, BUT MANY CHOICES

Like many things in business­, the question of whether to build, buy or lease data centre space offers no clear-cut answer. Requirements will be different for every company, and while leasing may prove to make sense for most companies, that may not always be the case. Executives must examine their organization’s unique requirements to come to an appropriate decision regarding build, buy or lease.

Even after a decision is made, executives may choose different options based on different use cases. For instance, representatives from an organization entering a new market may not wish to outlay the capital expenses necessary to build a new data centre, even if that’s been their primary methodology in the past. Conversely, an organization that has typically leased space may find they need greater control or security in their next centre, and opt to build or buy while continuing to lease space in another facility.

The only certainty is that companies seeking new data centre space will have many options at their disposal.

ABOUT DFT

DFT designs, builds and operates large-scale wholesale data centres. We help clients across various industries make smart IT decisions that match their business goals, including managing growth, gaining more control over their infrastructure, lowering operating costs, and adding data centre capacity quickly.

To learn more, please visit DFT.com or call 202.728.0044.

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