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5 Hidden Costs in Data Center Colocation

Data Center Colocation

Calculating Total Cost of Ownership (TCO) for data center colocation is a difficult, but necessary task.

Many data center owners today are faced with the difficult decision of keeping their data center onsite vs. outsourcing to a 3rd party colocation provider.  Some organizations are making the decision to outsource due to lack of in-house expertise or available real estate, while others are trying to evaluate the Total Cost of Ownership (TCO) of colocation as compared to an onsite data center.  

Calculating TCO for both offsite and onsite data centers is a complex task that requires careful planning and includes cost items like energy usage, staffing, tax incentives, maintenance, and much more. However, many data center owners evaluate colocation services without a thorough understanding of the lifecycle cost of outsourcing.  Before making a decision to outsource, it is important to cumulatively review the total cost of hosting your data center offsite, which includes more than the monthly rental rate you will pay per rack.  We’ve identified 5 hidden costs associated with data center colocation that owners should consider before making their decision:

1) Bandwidth

An advantage of going colocation may be the availability of bandwidth.  However, not all providers include this cost in the monthly rental fee for the rack (many don’t).  In addition, if you want to use diverse providers for redundancy, the cost will increase proportionally.  When you are soliciting price quotes, ensure that you are specific about the speed and quantity of telecommunications circuits you need to each rack.

2) Server Maintenance

In the traditional colocation model, the user still owns and operates their server, storage, and networking hardware.  Many owners fail to include the costs of annual hardware maintenance into their Total Cost of Ownership calculations.  Some vendors will augment their support contract costs to account for this.  In either case, it is critical that hardware maintenance is included in your cost evaluation of moving your data center offsite.

3) Escalation Charges

Escalation charges are a friendly reminder that we need to read the fine print of any contract well.  When signing a multi-year lease, some (not all) colocation providers will include an escalation charge schedule where your monthly rate will increase each year to account for energy costs, inflation, etc.  This could have a significant impact on the total lifecycle cost of outsourcing.

As a simple example, let’s imagine that you are looking to outsource 10 (ten) racks at a Year 1 monthly cost of $1,000 per rack.  If a 4.5% escalation charge over the 7 (seven) year term of your lease were included in the contract, here is what your total rental cost would look like:

Quantity of Racks 10
Escalation Charge 4.50%
Year Monthly Per Rack Annual Total Cost
1 $1,000.00 $12,000.00 $120,000.00
2 $1,045.00 $12,540.00 $125,400.00
3 $1,092.03 $13,104.30 $131,043.00
4 $1,141.17 $13,693.99 $136,939.94
5 $1,192.52 $14,310.22 $143,102.23
6 $1,246.18 $14,954.18 $149,541.83
7 $1,302.26 $15,627.12 $156,271.21

Escalation charges will apply differently to any contract.  In some contracts they may not be present at all.  However, owners need to be informed of the impact these charges will have on their total cost of ownership.

4) Remote Hands

Depending on your needs, remote hands service could have an impact on your monthly expenditure.  We recommend to most clients that a budget per month is allocated to remote hands and that cost is included in the TCO calculation.  For example, if remote hands are $150/hour and you anticipate needing an average of 10 hours per month, your TCO calculation should include $1,500/month for remote hands.

5) Insurance

Each organization handles data center insurance differently and it is important to evaluate how the move to an offsite facility will impact your annual insurance cost.  As an IT organization with an onsite data center, your annual budget may not include an insurance cost as the coverage is part of the overall facility policy.  However, when you outsource, a separate policy may need to be underwritten for the data center and that cost will typically be allocated to the IT budget.  Before starting the process of evaluating colocation, ensure that you review your current insurance coverage internally and discuss how it would be changed if you were to move your data center offsite.  

Calculating Total Cost of Ownership for colocation is a difficult task.  Many owners make the mistake of focusing only on rental costs of colocation without considering the full cost impact of outsourcing.  In addition to considering the 5 key points above, ensure that your organization allocates sufficient time and resources to truly evaluate having your data center onsite vs. outsourced and engage the right resources to help you make an informed decision.

Have you recently had to make a decision whether to outsource or keep your data center onsite. Give us your insight on calculating TCO and the impact it had on your decision. If this article is of interest, you might also like my conversation with Ron Vokoun where we discuss Build v. Buy and the Impact of TCO.