Make or Buy? A look at the global development of data centers
The technology landscape is constantly changing today. This repeatedly challenges company-owned data centers to provide enough space, power, and cooling. As companies grow and scale, it’s almost a given that they will need more data center capacity. In a wide variety of industries – from healthcare to financial services to retail and everything in between – large amounts of data are accumulating. And in all industries, applications are being developed that require high computing power.
However, not all workloads are suitable for the cloud, so a decision needs to be made. Should a new in-house data center (‘Make’) be created or space in a colocation facility (‘Buy’) be purchased? To make a decision, companies need to assess current and future infrastructure requirements. If these are variable, the cloud could be an attractive option. If, on the other hand, there is a need for fixed or steady growth, or if own hardware is required for other reasons, building or renting a data center is worth considering.
Advantages and disadvantages of Make or Buy
Of course, there are various advantages and disadvantages to all approaches: With building, companies have complete control over all aspects of the data center. With buying, they get many of the benefits of a data center but don’t have to shoulder massive resource investments. These are necessary for building your own data center. Today, the tendency is to outsource the data center in whole or in part to focus resources on core business. As a result, the data center market has grown exponentially.
All current market trends indicate that this growth continues at a rapid pace. The shift to the cloud, advancing virtualization, or the Internet of Things. Until now, building your own data center was the obvious choice for larger companies. The reason was that it made sense from a financial perspective and was often the only option. Over the years, however, the scale at which a data center must be built to be financially viable has increased.
Recent independent industry reports show that this is only feasible with a capacity requirement of more than about 15MW. So you have to build a huge facility to make a data center financially efficient. The scale has more than quintupled in the last 15 years. This is likely to continue to rise over the next ten years and beyond.
The 'Make or Buy' decision in detail
Let’s now take a closer look at the ‘Make-or-Buy’ approach and illuminate the advantages and disadvantages in more detail.
Location
An important factor when investing in your own facility is the associated commitment to a location. Once decided, the location commitment cannot be undone without significant costs. If it becomes necessary to relocate due to market or geographical changes, this is very difficult with a self-built facility. However, if you outsource to a colocation provider, they often have multiple data centers. Colocation therefore offers you far more flexibility to relocate your capacities to another location – either through physical or virtual relocation of servers.
When considering the location question, the costs at a colocation provider should also be considered. Due to the new CO2 regulation (since January 2021) and Germany’s exit from nuclear energy, operating high-performance data centers is becoming increasingly expensive over time. Due to these changes, some data center projects have even been put on hold.
Availability of data center space
Globally, some markets are experiencing a shortage of available colocation space. In such cases, a company may be forced to build. In the early 2000s, this was a likely scenario. However, nearly twenty years later, there is generally a good supply of data center space worldwide. Most data center providers now have locations in multiple countries and on multiple continents. Today, data center operators are building hyper-scale data centers that are so large that many customers can house their equipment there and also benefit from economies of scale within a colocation environment.
In the London market, for example, the availability of data center space has been good in recent years, with more new space being built each year. With about 80 percent of the total data center capacity in the UK, London has a total data center supply of over 420 MW. This is almost half of the total supply in the major European markets, which also include Frankfurt, Amsterdam, and Paris.
This ensures healthy competition in the market, allowing companies to find high-quality facilities at competitive prices. Furthermore, companies can deploy their servers in the shortest possible time at ready-built colocation sites, which is often business-critical. Additional capacity is available when needed, without wasting capacity or requiring extensions.
Customized Specification
A significant advantage of owning a data center is control. This includes access, maintenance, and future improvements. At the same time, however, this can also be a disadvantage: hardware renewals are required every three to five years. Moreover, operating a data center may not be among the primary competencies of the IT department, requiring additional staff or OpEx.
If a company decides to build its own data center, it has the advantage of being able to do so according to its exact specifications and possibly at its ideal location. At first glance, this is a clear advantage over purchasing colocation space from a third-party provider. In Germany, there are many planners (dc-ce, TTSP) and contractors (Mercury, SPIE) who support their customers in construction.
However, many data center providers now build their data centers in a modular fashion, so that most are located at highly optimized sites. The modular approach allows customers to co-design the design specification and equipment of their purchased spaces. This high level of customer involvement enables flexible adaptation of a purchased colocation data center. This is almost at the level of building one’s own environment, but also offers the advantage of utilizing the operator’s expertise.
Financial Flexibility
Financial flexibility is an extremely important aspect when setting up a data center, regardless of whether it’s an in-house investment or outsourced to a third-party provider. Setting up data centers is very capital-intensive and requires high investments. But there are other, often overlooked costs that can quickly add up: for example, for fire detection and suppression, as well as for facility personnel. Additionally, when expanding the facility, provisions for growth often need to be made, which makes the facility inefficient in the short term. Sometimes this leads to money being invested in spaces that may never be used.
Consider Costs and Effort
Beyond the pure costs, the effort for the daily operation of a highly available data center must be considered. Is the in-house team experienced and qualified to keep the infrastructure available at least 99 percent of the year? Is someone available around the clock to handle emergencies? What about maintenance and updating of the facility and equipment? Maintenance costs can amount to up to five percent of the original building costs annually.
Even if it is decided that building a data center will pay off within an acceptable timeframe, colocation can still be advantageous. A company specializing in the design and operation of data centers operates IT equipment more efficiently with higher power usage effectiveness (PUE) and in a better-controlled environment. This extends the lifespan of the hardware. When purchasing or renting colocation space, most providers offer their customers flexible contracts with conditions that allow:
- to reduce or expand the contractually agreed space over time according to actual requirements;
- to set the contract duration with lead times for installation. The full rent is thus only paid when everything is successfully installed;
- to determine the amount of electricity consumed, so that only the electricity used is billed according to a 'pay-as-you-go' plan. This maximizes the budget during times of low or high utilization.
All these points contribute to developing a more predictable expenditure model with plannable costs.
Data Center Security
Five to ten years ago, one could have certainly argued that an in-house data center is more secure. However, physical security, as well as cloud and cyber security, have evolved to such an extent that colocation providers typically have much better resources to invest in security than an individual company.
Technological Landscape
The IT industry is one of the fastest-evolving sectors in the world. As the colocation market for data centers forms the foundation for this growth industry, it must keep pace with this growth. Therefore, data center providers invest enormous resources in research and development to ensure that their colocation facilities are built to the highest efficiency standards and operated by experienced and certified professionals. This advantage is passed on to customers, giving them a competitive edge over their rivals.
Companies that choose to purchase outsourced colocation space can thus be confident that the space and power they buy today will provide future-proof technology and efficiency for several years to come. This saves the headache and costs of major data center upgrades that every company would have to regularly perform on their own facilities if they don’t want to risk becoming increasingly inefficient over the years.
Cloud Solutions
More and more companies are opting for a hybrid cloud model for their IT infrastructure, and easy accessibility to cloud services is crucial. By choosing colocation in a third-party data center, customers find themselves in an environment with a multitude of other customers. Many of these customers offer cloud platforms and applications. This creates a natural ecosystem where customers can benefit from the services provided by other customers.
Cloud solutions from providers such as Google Cloud, Microsoft Azure, or AWS can be just a cross-connect away in a premium data center that provides a cloud access solution. This easy access to public cloud platforms ensures a highly reliable environment.
To support this, most data centers have a good selection of carriers within their facilities that have provided extremely dense, high-quality fiber optic networks. This offers customers a wide choice in connectivity to cloud platforms and beyond. These connections are often 100 percent reliable, as failsafe options can be aligned for potential outages. For a company’s self-built data center, this option is usually considered too costly, which is why they often work with only one or two service providers, limiting their reliability and potentially increasing risk in case of a problem.
Conclusion: What now, Make or Buy?
The ‘Make or Buy’ debate has been intensely discussed for years. Building your own data center is resource-intensive and requires a considerable amount of experience. And that’s not all: Once a data center is built, it must also be managed, updated, and administered – all of which can be incredibly complicated, costly, and time-consuming throughout its entire lifespan.
The ‘Buy’ option offers the best protection against the increasing complexity and costs and risks of owning a data center. Moreover, it eliminates the need to worry about uptime, outdated technology, and future requirements. ‘Buy’ also means that valuable capital is not tied up and can instead be invested in core business initiatives. Outsourcing is not only more cost-effective but also more scalable and flexible. It also offers almost all the advantages of an in-house data center, but without consuming resources.
More and more companies have made the decision to move from their old, often expensive and inefficient facilities to high-quality data centers operated by third parties. They no longer want to build their own data centers, and many who have done so are looking for options to switch to a colocation/cloud solution and remove the significant real estate costs from their business. The analysis shows that the total cost of owning a data center far outweighs the perceived benefits. It seems, therefore, that the argument in favor of ‘buy’ has gained the upper hand once and for all.
