Data centres: To buy or not to buy – that is the question

Data centres: To buy or not to buy – that is the question A physics graduate, MBA holder and Chartered Engineer, Nick worked at Cable & Wireless before he founded Interoute Telecommunications helping to grow the business to revenues of £200 million before leaving in 1999. He then formed Saiph Communications as well as investing in a luxury hotel development in South America before co-founding Next Generation Data, operator of NGD, Europe's largest data centre, in 2007.

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When the CIO of a company recently contacted us about data space for housing 25 racks with the possibility of growing to 80 racks, he mentioned in passing that he was thinking about building his own data centre as an alternative. “We’re not experts in data centres but it would be much cheaper than buying from you,” he added.

Well, on the face of it, he could be right assuming a build cost of £2.5m, depreciate it over 10 years and you’ve a cost of £250K per annum, or per rack of £3,125 per year. That does sound cheap.

But how about the cost of capital, say an average of £100K pa, and equipment maintenance – perhaps another £50K pa? And of course rent and rates, say £90K pa, plus staffing where even assuming a bare minimum you will need £150K for salaries including all uplifts. So now the total is £640K pa or £8,000 per rack. Not so cheap after all.

But that’s the least of his problems. Remember he only wanted 25 racks initially. Those 25 racks now work out at an average of over £25,600 pa each. Still within a couple of years the data centre will be full so his price per rack will get back down to the lower level. But what if he keeps growing? What if he needs 85 racks? Where do the extra 5 racks go? Does he build another 80 rack data hall for a further £2.5m?

The build option looks cheaper than colocation only if the cost of real estate and staff are ignored and full occupancy is assumed

The foregoing analysis also assumes that he has an available site which is suitable (secure, safe from flooding and flightpaths), planning permission, a source of power, connectivity options, a quality design and build contractor and plenty of cash to invest.

By comparison, housing the same number of initial and potential additional racks in a modern tier 3 UK colocation data centre will cost between £5,000 and £10,000 per rack pa depending on location (with London/inner M25 locations being at the higher end of the scale). This includes space, power, cooling and associated infrastructure.

This illustration shows the own-build option looks cheaper than colocation only if the cost of real estate and staff are ignored and full occupancy is assumed. Some of the new single site ‘mega’ data centres – over 250,000 square feet – can further reduce the cost per rack by delivering even greater economies of scale. This is achieved by all data hall construction taking place within one building and the utilisation of a common facilities infrastructure (power supply, HVAC plant, fibre cross connects, security).

So why do so many companies consider building their own data centres? A charitable explanation is that they feel more secure with an in-house data centre and it’s more efficient for staff if the data centre is on-site. A more cynical explanation is that a data centre is the ultimate vanity project.

But as the saying goes, “Revenue is vanity, profit is sanity.”

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