Build or Lease? The Economics of Datacenter Facilities



December 2, 2014

Recent research shows that for most companies leasing a datacenter facility is more economical thanbuilding and operating one.buildorlease

Willemstad, Curaçao – December 2, 2014 – In today’s fast evolving business climate, companies rely heavily on the availability, quality and consistency of their IT infrastructures in order to guarantee the continued success of the business.

The traditional approach was to host all IT infrastructure in-house. However, as business expands and demands for additional IT services increases, companies are increasingly faced with the challenge of meeting increased power and cooling demands.  As a result, sooner or later they are faced with the critical decision to either lease or (continue to) build-out their own datacenter facility.

Each approach has its own unique benefits and challenges.  Building a datacenter provides perceived control over the facility and its operations. On the other hand, leasing a datacenter presents an attractive operational expenditure model with better access to space and power, improved security and the ability to expand faster at a lower cost.

So what is the right decision for your business?  We take a look at some recent research to answer this question.

 

Datacenter facilities are your most expensive investments.

There’s a good chance that your datacenter facility is reaching its limits on space, power and/or cooling capacity.  A recent research by Forrester finds that there are three primary drivers behind this: data growth, virtualization and consolidation. Forrester estimates that storage consumes anywhere between 5% and 15% of the total power consumed by the datacenter. 

With data growth between 25% and 50% YOY, the explosion of data growth is having a real impact on datacenter capacity.  In addition, as companies drive their virtualization deployments to greater densities of virtual machines per physical machine, companies are driven to look for new facilities that can support more extreme densities.  Lastly, organizations are consolidating their multitudes of small data repositories and smaller datacenters into centralized regional sites.  

However, the decision to build a new datacenter can’t be underestimated, as it will likely be one of your largest infrastructure investments. Many companies don’t fully understand the costs associated with building and operating a datacenter before they commit to this option.  Similarly, many companies don’t fully assess the risks that they are potentially shouldering.  Before making this big decision, it’s imperative that organizations understand all the options, their pros and cons as well as their risks and costs.

Three factors determine the economics of datacenter facilities

It’s imperative that organizations objectively evaluate the financial impact on their business when considering leasing versus building a datacenter. Three critical factors that ultimately should help to determine your final decision are:

  1. Benefits – How will your company benefit from leasing versus building a datacenter?
  2. Costs – How will your company pay for your datacenter facility?
  3. Risks – How do uncertainties change the total impact of a datacenter on your business?

Let’s take a look on how the key benefits of leasing versus building a datacenter compare.

As can be seen from above, there are significant benefits for leasing a datacenter versus building one.

Now let’s take a look at the cost comparisons between the two options:

 

Again, some clear benefits and clarity in terms of costs for considering leasing over building.

Beyond Dollars and Cents: consider Core Competencies, Risk and Forecast

 

The financial benefits of building or leasing a datacenter are critical decision points but organizations should think beyond just dollars and cents.  Beyond calculating the total economic impact of a leased versus owned datacenter, recent study recommends organizations to ask themselves the following questions:

  • Is owning and operating a datacenter a strategic differentiator?  An import consideration in the lease versus build decision is core competency.  An important question to ask yourself is whether you want to be in the business of running a datacenter.  Can you operate a datacenter facility as well as, or better than, a third-party provider?  For most organizations, the answer is no, and they would be better off directing resources toward other more differentiated or strategic areas.  But in some cases, the answer is yes, if your organization is a producer or operator of technology or a large operator of industrial space, for example.  In these less common cases, when it is a strategic differentiator to run a datacenter, whether or not it makes economic sense for the company, building could be the more advantageous option.
  • How effective is my organization’s capacity planning capability?  An important early step in planning for a new datacenter is forecasting how much capacity your organization will require.  If you’re building a datacenter, you will need to forecast out the capacity for up to 15 years in advance, a difficult task for many organizations.  If leasing, the forecast only needs to extend to the life of the lease, generally less than five years.
  • What is my organization’s risk tolerance and culture?  Building a datacenter facility is accompanied by the risk associated with making a massive capital investment.  However, leasing a datacenter facility has associated risks involving the loss of control of every aspect of a facility.  Which of these risks is more tolerable to your specific organization?

Conclusion
In summary, there are clear advantages and disadvantages for leasing versus building a datacenter and each organization should do their own due diligence in order to determine what’s best for their long-term success.  However, it is clear that from a purely economic assessment perspective, the choice of leasing a datacenter greatly outweighs that of building a datacenter facility.  Furthermore, organizations should consider additional critical factors such as their core competency for running and operating a datacenter and also the associated risks and cultural tolerances that each organization can afford to sustain.