Trimming the fat

A recent study conducted in North America by IMS Research found that the colocation market will be worth $10 billion by 2018. However, this does not represent a guaranteed windfall for colocation companies. Whilst organisations are indeed becoming ever-more reliant on IT to operate, and in turn requiring ever-increasing IT capacity in order to keep abreast with new developments, any gains are far from certain. Colocation providers must make sure that they are providing the most capable and competitive service possible to their existing and potential customers, as there are now options available that could push colocation into the background.

To begin with, many enterprises are choosing to either receive IT services or host servers entirely over the cloud so removing the need for in-house or colocated infrastructure entirely. At the same time, a growing number of enterprises are taking their IT infrastructure back in-house, as the cost of maintaining and powering servers drops. If colocation providers cannot react to these challenges, they will find their share of that $10 billion is trifling or non-existent.

Understanding the challenge: the cloud

As the success of Amazon Web Services and other service providers shows, the cloud is still a booming market, and a substantial competitor for colocation providers. Cost savings and predictability, together with the speed and flexibility of services, are all valid reasons for businesses to adopt the cloud over a colocation provider. For example, when adopting a cloud-based service, an enterprise will only pay for the precise services it is using; allowing them to tailor what it receives to its exact needs. This will then be very clearly delineated on the enterprise’s bill, meaning the business can be certain it isn’t paying for any services that are unused, or worse, paying for the same service twice over. The predictability of cloud-based costs is also a threat to colocation providers; cloud services can provide CFOs with a full breakdown of costs, allowing them to predict the exact cost of a service over time and so tailor their budget to the penny. On top of this, many enterprises can see the cloud as a way to access more sophisticated capabilities without the large up-front costs that would be required with colocated infrastructure and services.

In terms of speed, the time taken to implement and configure an IT infrastructure in a colocation centre could conceivably be measured in weeks, while businesses using a cloud provider can get services up and running within a matter of hours. This level of flexibility could be a crucial tipping point for an enterprise planning to radically modify its services and infrastructure.

Understanding the challenge: the enterprise

However, many other enterprises have realised that retaining IT services in-house can actually make a lot of sense. With a greater understanding of how to manage IT infrastructure, this trend is accelerating; especially as many enterprises consolidate their IT infrastructure. For example, in 2012 General Motors announced it would switch its IT services from being 95% outsourced to being entirely in-house. As part of this, it would consolidate a worldwide network of 23 data centre spaces into just 2. Switching from multiple, relatively small colocated data centres to a single in-house facility can make financial and operational sense to an enterprise, but will leave those colocation providers out in the cold.

There are further reasons to bring infrastructure back in-house. For instance, enterprises can design a data centre that corresponds to their exact needs, eliminating anything that is surplus to requirements and ensuring that their infrastructure is as lean as possible – something that a colocation provider serving multiple customers with varying needs and capabilities cannot hope to replicate. Peace of mind is also a strong motivator - as data centre management becomes better understood, more enterprises prefer the certainty of knowing exactly where their critical services and data are kept along with having complete control over them and being able to monitor and react immediately to any problems that occur.

Making the case for colocation:

Both of these developments could make the prospects for colocation providers look grim indeed. However, savvy providers can still give enterprises food for thought when they examine the full range of their IT options. Whether counteracting the perceived cost and flexibility benefits of the cloud, or reassuring enterprises that a colocation centre is equal to the in-house alternative, colocation providers can still make a strong case for their business.

For any enterprise, the decisions it makes will eventually boil down to cost; not only whether it is making the most cost-effective choice, but also whether it understands the details of the options enough to make that decision. The first step for any colocation provider should be ensuring that it both understands, and can predict, the exact Total Cost of Ownership; not only of its data centres as a whole, but also of every single customer and service that uses them. Traditionally this would have involved time-consuming manual calculations that would, by necessity, have had to make certain assumptions or omissions to make them workable, in turn compromising their accuracy. However, modern prediction and analysis tools mean that providers can calculate costs using all available factors in a fraction of the time, so making predicting costs a much faster, more reliable process.

This level of relatively simple information in turn allows colocation providers to become much more competitive. To begin with, the colocation provider can ensure its own costs are under control and it is providing services as efficiently as possible. If nothing else, merely deferring investment in extra capacity until it is needed can save providers significant amounts in interest payments alone. Beyond this, a colocation provider should now be able to predict and provide exact costs for a customer. This instantly removes one of the cloud’s competitive advantages, and can also provide an advantage against an in-house data centre if the project cannot give the same guarantees of cost. Colocation providers can then make clear exactly what these costs could mean, for example, detailing the strength of their communication links, security, or management expertise that they can provide.

Colocation providers can then take these predictions even further, becoming consultants to their customers, as well as simple service providers. One product of fast, accurate TCO calculation is that a provider can very quickly predict the outcome of any potential change to the IT infrastructure.

It can use this to advise customers on what will be the most cost-effective means of investing in IT, reducing costs for both the provider and for customers. For instance, Ark Data Centres used predictive tools to advise a client on a project that required the use of more server space. Simply by advising on the best timing for removing blanking plates and bringing those servers online, Ark was able to save the client 5 to 15% in energy costs.

By mastering the TCO of their facilities, co-location providers will ultimately be able to design their data centres with different cost (and performance) objectives depending on their target customers. Facilities aimed at cloud providers, for example, will be built more cost effectively and with less redundancy mechanisms than those aimed at mission critical applications in the financial industry. Thus providing a cost structure that is tailored to the needs of their customers.

Colocation providers are certainly facing increased pressure from developments in how we use and access IT. Yet by taking control of costs, and ensuring they are positioned against the competition, they can ensure they are placed to retain and grow their share of the market.