Podcast: The Data Center Debate of Build vs. Buy: New Twists on a Traditional Data Center Quandry.

Building a data center may make surprising sense for some organizations.
Building a data center may make surprising sense for some organizations.

In part 4 our series on IT infrastructure planning with Jeff Gilmer of Excipio Consulting, the conversation turns to the age-old debate of “Build vs. Buy”. With virtualization now part of the equation and more data center data center leasing options, how have the fundamentals changed in considering whether to build and operate your own data center or to outsource it to a provider? How do resiliency requirements factor into the decision? How has the break-even point changed over the years?

Jeff has worked through this issue with many clients over the years, and you’ll learn from his experience in this discussion. You can listen to the full conversation, or read the transcript below the player.

 

 

Transcript:

Kevin O’Neill, Data Center Spotlight: This is Kevin O’Neill with Data Center Spotlight, and I’m here with Jeff Gilmer of Excipio Consulting, and the topic for today’s discussion is, it’s a timeless one in the data center world, Jeff, and it’s build versus buy, and I remember when I first got into the data center business, 2009, or 2010, in that range, one of the first things I did from a thought leadership and marketing perspective was a lot of build versus buy work, and we’re still talking about build versus buy, but some of the decision points, and some of the factors involved have progressed significantly, and build versus buy is a very different decision than it was six or seven years ago, isn’t it?

Jeff Gilmer, Excipio Consulting: Yeah, most definitely, obviously there’s technology changes, there’s financial ramifications, there’s business ramifications, the data center has become more of the heartbeat of an entire business, obviously, different types of decisions are made when it comes to looking at the data center.

Data Center Spotlight: Let’s talk about, Jeff, some of the common questions people have today in regards to their data center decisions. I hear people asking, what are the advantages in a long term commitment to build a data center? In some instances, are there advantages in a long term commitment to build a data center? I hear people asking, would we be better off utilizing an external hosted facility? Do we want to be in a colocation facility, a multi-tenant data center facility? Would that be better than a build? If we do build a data center, or if we buy services, what are we getting in exchange for our investment?

How does virtualization, how does cloud computing, how does a hybrid strategy enter in these decisions as well? These are all questions I’m hearing. What are some other questions out there that people are asking regarding the build versus buy issue, Jeff?

Jeff Gilmer: All of those are very common, probably one of the biggest ones we hear is we’ve got an aging data center. The last time data centers were updated, in most cases, was Y2K, and here we are in in 2016 with data centers that have a 15-year life, and that data center has aged, and probably have not made any significant upgrades, or updates to it. So how do we address that aging data center? With the advent of virtualization, and the advent of cloud, we get a lot of people asking, how do we handle our production data center, versus disaster recovery? How do we handle test and development environments? Should some of these be in the cloud, and not even be in the data center, or should we have them in a traditional data center environment?

And then, of course, you’ve got a lot of people, you look at the external service providers, they have a tendency to promote tier level. We’re at a tier level X, whether it’s 1, 2, 3, or 4, and that’s how they’re talking about the capabilities of their facility. We really would rather see the people ask us, is tier level really important, and how does that really compare to our business requirements, and what do we really need? I think, well, tier level has helped categorize things in the data center world, it’s also made things more confusing for the consumer that’s looking to purchase data center services.

Data Center Spotlight: You could make a point that there’s some misuse of tier level in a lot of providers out there, and the way they market themselves, but that’s a topic for a different day. Let’s talk about the build versus buy, Jeff, and there are benefits of owning, and there are some disadvantages and drawbacks of building and owning a data center. Can you describe some of the key benefits of owning a data center, along with the areas that might be a little bit of a concern that should be considered?

Jeff Gilmer: Yeah, let’s talk a little bit about building, and we can talk also about the external service providers maybe following this, because both of them have their own advantages and I don’t know if I’d call them disadvantages, or things that are significant that you need to understand. Obviously, when you’re building your own facility, you’re using your own cost structure, you’re not dealing with an external provider who has to make a profit to stay in business, so owning a data center is typically going to be your lowest cost option long-term, and long-term, we’re talking about a data center that has a life of 15 years, so if we’re looking at the financials over a 15-year period, owning your data center will definitely be, in most cases, the lowest cost alternative for you.

Some of the other benefits I’ve seen of owning is, if there’s an organization that has multiple data centers, and this is pretty common where each business entity or in a public sector, each department or agency, may have their own data center, and they grew up through the technology era, owning their own data center, and running their own data center. Well, if you have data centers have today, then let’s just say you have four, or five, or six data centers within your organization, and you really need maybe two, one for production, and one for disaster recovery, and two of those facilities have the capability to be upgraded, and you can consolidate those other three, four, five into the two you already own, many times that makes more sense than it does migrating externally. You can continue to operate what you have.

Some of it revolves around the types of services, or applications, or regulatory issues, or compliancy issues, the benefits of owning is the organization owns the facility, and they can make their own independent decisions. Sometimes, they need to do make decisions of their data center operations that are unique to their particular organizations, that if you’re in an external provider, you need to follow their policies, or their scenarios. Those are probably some of the more significant issues of owning. Did you also want to talk a little about some of maybe the other things that need to be considered that could be considered disadvantages, or things that maybe need to be aware of, Kevin, or would you like me to-

Data Center Spotlight: Yeah, I’d like to introduce a disadvantage that people don’t always consider, Jeff, and that is, are you a data center company? Will owning and operating a data center detract from your core mission, and I think that’s why you see, most of the time, the companies building a data center, pretty significant organizations, because they’re used to having a lot of different divisions, and getting a lot of things done, but the more narrow the focus is of an organizations, sometimes maybe owning a data center isn’t a great idea for them because it just introduces complexity to their business, and some of their attention would be better spent on their customers and their business. I know there are other issues you wanted to discuss, but I just wanted to mention that one as well.

Jeff Gilmer: Absolutely, and that depends on the size and the structure of the organization, but along with that, as you start to look at, I don’t want to categorize the smaller organizations, but an organization that maybe doesn’t have the capital, because there is a significant upfront investment that is needed to initially construct the data center, or even upgrade a current facility that they have. So the client needs to be willing, or an organization needs to be willing to make that upfront initial investment, and understand that it’s a long-term commitment.

You’re talking about a 15-year commitment of your capital that’s going to go into a data center facility, that when you look at technology, you can go forward three years in technology we have a pretty good feel for it. You can go out to years four and five, and it starts to get a little grey, but you’re talking about making a capital investment for 15 years, knowing who knows what our technology’s going to be 10 years, 15 years from now. Are you willing to make that investment?

So, that all comes back to should I really be in the data center business in any effort or another? And then of course, as technology changes, and your business changes, how flexible is owning that facility, where maybe externally there are cloud solutions as an example, externally, that you can ramp up and ramp down. There are organizations, I’ll give you an example, one client of ours, who does all of the billing for literally thousands of school systems across the United States for all school lunches. They’re the billing components that schools work with and actually contract with to perform all of the billing for all their school lunches. Well, that’s great from September through May, but really June, July, and August? They don’t need to have a lot of expense from that school district to be paying this company, so in their environment, a cloud solution where they can ramp up for nine months of the year, and they can literally almost shut it off for three months of the year, is a great use of their funds, and a great use of the data center, but they’re not going to own their own data center and turn it off for three months. Using a cloud solution, an external, it’s a great advantage for them.

Data Center Spotlight: That is a great example of a unique business that benefits from a cloud solution, Jeff. Now we just talked about owning a data center, the benefits and some of the drawbacks. Let’s talk about sourcing, and purchasing data center services, and what should be considered when evaluating external providers, I guess we’re largely talking about colocation providers, multi-tenant data center providers here. What are some of the benefits of sourcing, Jeff, and what are some of the disadvantages?

Jeff Gilmer: Yeah, well, some of them, of course, are the opposite of what we just talked about. You’re not making a capital investment, you’re typically shifting operating costs, there might be some capital for implementation or migrations of that facility, but you’re conserving your capital, that’s the biggest issue that you have there, and you’re not having to worry about making a 15 year type commitment, and investing your capital into a 15 year investment, not knowing what type of return that’s going to give you, and let’s be real here, IT in general, and a data center specifically, is not a revenue-generating issue for a company. It is a cost of doing business, and having the nicest, fanciest data center doesn’t necessarily mean you’re going to generate more revenue than having an average data center. It really comes down to what the business needs.

Some of the other advantages, you can move into a colocation or an already up and functioning data center fairly quickly. If you’re going to build a data center, you’re probably talking 24 months, 2 years, the decision you need to make. You could migrate into some colocation venues in 30, 60, or 90 days, because they’re up, they’re functioning, everything is there. You’re simply going in, acquiring your compute devices, and implementing them within a different facility. Network connectivity might be an issue, but a lot of those providers already have multiple regional, local network providers already connected to the facility, so it’s really a matter of implementing that fiber and connecting that fiber to your facility from that perspective.

And, it can give you the flexibility that we just talked about. There’s a lot of flexibility, you can ramp up, you can ramp down, as your business goes up, you can very easily add additional space in the colocation, or you can add additional racks, or additional equipment. You can also flex that back down. Now of course, the providers aren’t going to be quite as open and willing to do it monthly or whatever, but maybe every quarter, every six months, every year you can make an adjustment into your cost structure with your contract to best match your business.

So, the flip side of that, again, that company has to make a profit. So if you look at it over the long term, we can talk about financials in a little bit here if you would like, but over the long term, you’re typically going to pay a higher cost than if you own that facility. One thing that people need to think about, I don’t know if it’s necessarily a disadvantage, or not, is realize you’re going to have to conform to that data center’s provider’s policies, procedures, some of their ways that they control the facility, their monitoring, their management. Now that may not necessarily be a negative that you have to conform to them, it really depends on your data center today. You may not have solid monitoring and management today, you may not have a data center infrastructure management tool that’s functioning in your facility today. So rather than implementing a tool and going through all of that with your own, it might make sense if your data center needs other updates to migrate to an external service provider who already has that capability, and the majority of those people provide you with a web-based portal that you can access, and you can see things such as the climates around your particular racks. Temperature, cooling capabilities, power capabilities, and other things through the tool.

So, what some people may say is a disadvantage, I’ve got to conform to them, in many cases, is that the facility is not of the same spec level as the external providers, it might be actually an improvement for you. So, those are all the different things you probably want to consider when you’re looking at sourcing your data center services.

Data Center Spotlight: That’s interesting, Jeff, we’re talking about a lot of different factors here, it involves their business goals, and their operations, the seasonality of their business, and whether traditional data center is better for them than cloud, but really when you boil down to it, for most companies, I would imagine, it’s a financial decision. So, let’s maybe talk a little bit about the financial difference between the two, between building your own data center versus purchasing your data center services. What are you finding over the long term, at what point from a financial perspective, what’s sort of the tipping point financially over time, Jeff?

Jeff Gilmer: Yeah, so that’s a good question, Kevin. There’s a lot of different things that go into the financials, and the reality is, the majority of our clients, when we start to work at them, miss a lot of those costs, and don’t quite understand how to categorize them or how to determine it. It’s nothing about their ability, it’s the fact that people only move or consider a data center once every 15 years or so. So it’s not something they’re doing every day, and with all the changes over 15 years, a lot of things can get categorized incorrectly.

Data Center Spotlight: It seems like a lot of people who are making those decisions, in my experience, a lot of people making those decisions within organizations, it may be the only time over the course of their career that they’re involved in that decision.

Jeff Gilmer: Yeah, I would say that that’s true. Many of the clients we go into, when you work with their IT department, there isn’t a single person there who’s ever completed a data center assessment, or a data center migration, so obviously it is something that doesn’t happen very often in their career. Commonly, we’re going to look at the costs, and try to get a good factor for those costs from a basis where we can do a comparison. Now it gets a little bit difficult because, if you’re buying your own data center, if you’re going to build your data center, there are two different time parameters. Buying a data center, most colocation providers, or external service providers, you’re going to look at probably a five-year contract with them. Some of them might go seven, some of them might go ten, but five years is probably what you want to look at for an external provider contract, for the longest time period.

If you’re going to build, you’ve got to look at those costs over the life of the asset, and the life of the data center asset is 15 years. So now you’ve got to look at that comparison. So you’re really taking reliable cost for five years in a buy situation, and you’re multiplying it by three, or you’re breaking it down into an annual cost to do a comparison to match up with your 15 year assets. Now in general, if you look at, let’s just take probably the four most common things out there. Building a new data center, colocation, doing some sort of managed service, where you layer on top additional services as you go along, for instance, a cloud or outsource type solution where you’re going to more of a overall, really turning the keys over to them to provide you, and you’re purchasing on a transaction. Of those, surprisingly, the managed services of where you’re buying a baseline, maybe a colocation, and then you’re adding some things, we would call them the installation, or the overall management of the servers, or something like those, that traditionally happens to turn out to be the highest cost option, because you’re buying everything a la carte, and by the time you buy it all a la carte, your costs are much greater than had you worked out a package agreement with them.

You can think of it in terms of, you go to build a car, if you take your car today and you go purchase that car off a lot, it’s one price, but if you were to go to NAPA Auto, and buy every single part for that car, and build that car from part by part by part, it’s going to be multiples of the cost of that car. Well, that’s what happens in the managed service environment. So, we really recommend you fully understand your requirements, and negotiate your external contract rather than layer on services as you go, just understanding that from a cost perspective.

Now let’s go onto the build versus, let’s just say a colocation. Traditionally, when you start out with colocation, you’re going to be lower cost than to build. The build, you’re making a significant capital investment, in other investments, you’re going to have a higher cost as you initiate that, but over time, the profit that the external colocation provider needs to garner to continue to function will catch up and exceed the cost of build, and what we’re really seeing in a lot of cases, is that breakpoint is somewhere around six or seven years. So what happens is, up until six or seven years, your colocation is probably lower cost because you’re taking advantage of the shared environment that they’re advertising, the cost across multiple tenants versus if you’re making that capital outlay to build, you are serving 100% of that cost structure. There’s nothing to share in that environment, and then what happens is, somewhere around the seven-year point, that profitability that that external provider needs to make to continue to run their business starts to exceed the capital investment, or the depreciation that you had within your own build, when you build and construct your own data center.

The reality of it is, if you put this into logical terms, if we know that somewhere around year seven is where the costs are going to break even, we ask people, I want you to go backwards and think seven years ago, what was your data center environment? Seven years ago, how many servers did you have? Seven years ago, how virtualized were you? How dense was your storage? Now, let’s move that forward seven years, and are you willing to basically make the business decision, or take the risk that seven years from now, I’m going to need to still need that data center, or would you rather be in a flexible type of contract with an external party that you could renegotiate that contract five years from now, before you get to that seven-year point and based on your IT needs and your business needs, and your technology needs? That’s really what it comes down to, are you willing to take the risk that beyond seven years, you’re still going to need to own that data center?

Data Center Spotlight: It is certainly a decision that can have an immense financial impact on companies, and speaking of that financial impact, Jeff, let’s talk about a build versus buy business comparison a little bit further. I know in your work you help people understand the differences from a business perspective when defining their data center options. Can you give us an idea of the key areas organizations may want to evaluate in that decision process? I know you’ve touched on some of them, but I know you go a lot deeper than that as well.

Jeff Gilmer: Yeah, so some of the key factors are, making sure that that data center facility has the resiliency level to meet your business requirements. So, when I speak at the Critical Facility Summit every year in October, we talk about what is a critical facility? What are the definitions? What are the regulatory requirements for a critical facility? And a critical facility would be things such as healthcare, financial, insurance, anybody that has regulatory, in the public sector, it would be your public safety and your human services that might impact lifesaving issues if they’re not available, but there are regulations that have been put in place related to what level of facility you need if you fall in a critical facility nature. And then, there are others that fall under certain regulatory or compliance, or a big one related to resiliency that people miss is their corporate insurance policies. Many of the corporate insurance policies today require certain levels of redundancy of data, redundancy within their data center, redundancy within their technology, or they’re not going to pay a claim, and that all comes into play. So, start by looking at resiliency level. Again, look at your longevity, and your capacity, how long is your current facility going to last? That will help you with making a data center decision.

Looking at your future facility flexibility, and what I mean by facility flexibility is a couple of things. One, you can build or design a facility today that you only purchased the power, and the cooling in a rack and row basis, or a rack basis, or a pod, or modular basis instead of building out the entire raised floor like we did in the past. So you’re only making your cash investment based on what is needed today from the flexibility. For an external party, you look at your contract, maybe you negotiate a contract with a colocation provider that’s a three-year contract with options for years four and five, and you have within that contract the option to quarterly, semiannually, or annually flex up or flex down based on your compute demands. Maybe you virtualize a significantly greater amount of your physical servers, and in year two, you went from 15 racks down to 10 racks. Well, obviously you don’t want to pay for 15 racks for the space in that colocation provider, you only want to pay for 10. So, flexibility is key from that standpoint.

Transition timeframe, how soon do you have to make a decision? So if you go back, and you extend the longevity of how long you can last in your current facility, and then how long you have to migrate to a new facility, can have a huge impact on your decision. If all of a sudden you realize that you’ve only got 12 to 15 months of capacity left in your current data center, you’re probably not going to be able to build a facility, and even though those design and build companies are going to come and tell you, oh, we can do it in 12 months, they can build you a facility in 12 months. The parts they forget are, you’ve got to find a site. You’ve got to do site selection. You’ve got to do permitting. You’ve got to validate that the site can be viable for you. Well, just going through site selection is commonly three months. Going through the permitting process might be three months, so now you’re six months into it. Then, let’s say, they do the design and build and it is 12 months. Now you’re at 18 months, and then after that 18 months, now you’re ready to move in, but you’re not ready to move in your servers, what you’re ready to do is build the network core, and test your network core, and maybe that’s three months.

So you’re really talking 21 to 24 months of time period before you can move in. Well, if your current facility is only going to last you 12 to 15 months, you may be forced, or essentially need to look at an external provider where you can move in in 90 days or less. So, those are some of the key business drivers. The resiliency level you need, the longevity you need, the design flexibility, how quickly do you have to migrate, those are significant factors that you need to take into account in your data center strategy and your decisions.

Data Center Spotlight: My takeaway from that, Jeff, is that there are just an infinite number of factors that can influence this decision, and there’s no company out there that has all of the same factors. Everyone is different, everyone has different needs, everyone has a different situation, everyone has different capabilities, everyone has different access to capital. I know it’s a very specialized work that you do, and I would imagine you’ve never done an engagement, an analysis that is probably even close to being identical to another analysis for a client. Jeff, would that be an accurate projection on my part?

Jeff Gilmer: Yeah, every organization is different, people say, are more people building, or are more people buying, and they always ask us that question, and I just kind of get the deer in the headlights look like, people are doing both. It depends on their scenario, it depends on their situation, it depends on where they’re at, and the key thing is, well, I’ll speak a little bit about Excipio here. We have a methodology that we developed 15 years ago for doing data center strategies, and if you use a common methodology, and looked at our methodology, we’ve done hundreds upon hundreds of data center assessments in recent years. We have a nice database in there where we can do comparative analysis for people on what’s really happening. Those are important components to understand and to look at, whether you use Excipio, or you use somebody else, or you have another source for that, make sure that you’re following a standardized process, standardized methodology, and that you have accurate benchmark comparisons of what people are really doing.

Nothing against the providers, the providers are out there, they provide great information, but they’re out there to sell their data center services, that’s their goal. You really need to have an unbiased approach to that, and when you go through that approach, and you understand that, and spend the time planning the facility, you’re going to have greater success. To give you an example of one client that we had, that they jumped in and they were working with a construction company already, and they didn’t have a strategy, and they figured that they wanted to build a data center and move within the next year, and the construction company actually said, you know what, we want to bring Excipio in because we want to do it right. It was both for the construction company’s benefit that it was sized properly, it was built properly, the migration occurred properly, because it was their reputation, but also for the clients we have. So, that client really understand what they were doing.

So in their case, we were able to go in, and we actually spent 18 months of planning and 12 months to build and move that data center. Now, the client already owns the land, they already had the fiber connectivity, they already had the power, because it was a campus environment, so we could do a data center within 12 months, but the 18 months of planning meant that we built, migrated, moved their entire production environment to this new data center in 12 months with no failures, and no downtime, and that was significantly important for this particular client. So, everybody is different. My point behind this is, it’s the old thing when you’re working with your dad, he was telling you how to cut a piece of lumber, it was measure twice and cut once, same thing with the data center. Spend your time building your strategy, reviewing your strategy, and understanding your strategy because you do not want a failure when you move a data center, whether it’s one application, whether it’s a series of applications, whether it’s a critical service you provide, you do not want to have a failure as you make that decision and move forward.

Data Center Spotlight: Jeff what would be the best way for people to engage with you if they wanted to talk to you about these issues within their organization? I know you mentioned you present on this issue at the Critical Facilities Summit every fall in Charlotte. I know you do workshops across the country, and I know you otherwise engage with people who are interested in making sure their organization is doing the right things here. What’s the best way for people to engage with you and get in touch with you?

Jeff Gilmer: Yeah, so again, the Critical Facilities Summit is coming up in October. I will be leading a build versus buy workshop that will be in the afternoon of the first day of that event, anyone who attends, as I understand it, the Critical Facilities Summit is invited to participate in the workshop, and we’re going to go through a lot of different things in the build versus buy, we’re going to talk about the requirements. We’re going to talk about how to deal with an aging data center, we’re going talk about, do I upgrade? What about leasing a building, and building it up? What about colocation? What about cloud? What about outsource? What about new construction? We’ll talk about each of those in detail, and you can find information about that particular event that we’ll be having in October, or any information about Excipio at our website, which is excipio.net, and it’ll list other seminars and other events that we have around the country. As well, I would encourage you to look at our data center solution suite for data center lifecycle management. It’ll give you a lot of information and just talk about methodology and strategy and some of the key things that you probably want to focus on in your own data center environment.

Data Center Spotlight: Well, Jeff, I appreciate your time today. It’s always interesting to talk to you about these issues, and I look forward to the next talk in our series.

Jeff Gilmer: That’s great, Kevin. Thank you and have a great rest of the day.

Data Center Spotlight: All right. Thanks, Jeff.