40% of enterprise IT managers are paying more for colocation contracts than they had initially planned or expected, according to the Uptime 2016 Survey. One important way to keep costs in check is to pay close attention to the deal terms when negotiating with a colocation provider, and to parse out the impacts of those terms over the entire life of the contract. Here are 5 questions to help you do exactly that.
Question #1: How does your pricing model help me align my data center with my business?
Business is unpredictable. Technology is unpredictable. Yet most data center colocation leases require a fixed commitment for five or even ten years. As a result, they’re likely subject to over-provisioning – and over-spending. According to Gartner analyst Bob Gill in A Concise Guide to Negotiating Colocation Renewals, “Colocation customers frequently pay for far more than they use. It is extremely common to find colocation contracts in which two or even three times the capacity that is required has been allocated and therefore paid for the duration of the contract.”
So as you’re shopping for a colocation provider, take Gill’s advice and look beyond the discussion of quantity of units and price per unit – to consider how a data center can allocate sufficient power for today’s needs and leave in place a mechanism to expand the footprint and power allocation if the enterprise’s needs grow. As Gill urges, seek a more transparent and usage-based pricing model.
Question #2: Do you charge me a fixed $ per kW infrastructure fee? What’s the ramp schedule?
In our recent post How Does Your Data Center Break Down Pricing? we explained how the Aligned Data Centers pricing model is designed to be exactly what Gill calls for – transparent and usage-based. It’s how we enable our customers to accommodate future growth without overpaying today.
The root of the difference between our pricing model and the traditional colocation model is the fact that we disaggregate infrastructure charges from a single static charge (traditional model) into a nominal fee for reserved space and cooling capacity and a competitive fee for allocated power, which makes our pricing model dynamic, just like your business. And, we’re completely transparent with prospective customers about what colocation with us will cost (talk with a sales engineer to see for yourself).
Beyond differences in the way we charge for data center infrastructure, there are also differences in the commitment we require our customers to make. A traditional model requires customers to commit to a certain amount of data center capacity, which they are beholden to “take or pay” (take down capacity or pay anyway) according to a fixed ramp schedule. After the ramp schedule has fully kicked in, say, after the third year, customers pay for 100% of the capacity they’ve committed to, regardless of how much they’ve actually provisioned for use.
In contrast, in a dynamic data center model that disaggregates the infrastructure fee into reserved capacity and allocated power, customers are only committing to the reserved capacity, and only charged the allocated power fee once the infrastructure is actually provisioned for use. That means you take down (and pay for) capacity only when you actuallyrequire it, not according to a pre-determined ramp schedule. And it dramatically reduces the upfront commitment, or minimum obligation, required. (By 50% in the example cited in How Does Your Data Center Break Down Pricing?)
Learn more about how upfront colocation commitments will affect your balance sheet in To Find the Silver Lining In New Lease Accounting Rules, Look to the Data Center.
Question #3: Is PUE used to determine my monthly energy costs? What is the PUE compared to industry average?
In the standard colocation pricing equation, monthly energy costs are represented as E where E is the power consumed (in kWh) multiplied by the cost of metered utility (in $ per kWh) multiplied by PUE.
Monthly energy cost = Power consumption * Utility rate * PUE
PUE, or Power Usage Effectiveness, is the ratio of all energy consumed by the data center to the energy actually consumed by the IT equipment. It tells you how much energy your IT is using and how much goes to data center overhead. When PUE is included in the cost equation, it has a significant impact on your total monthly energy cost.
At Aligned Data Centers, we use an annualized PUE of 1.15 in the equation above to calculate our clients’ monthly energy cost. Guaranteed. No fine print. That compares to an industry average annualized PUE of 1.8-1.9, according to the 2016 U.S. Data Center Energy Report.The difference between a PUE of 1.15 and a PUE of 1.8 or 1.9 can make a significant difference in costs over the term of a colocation contract – energy costs could easily be 50% higher in a data center with a PUE of 1.8 versus a PUE of 1.15.
In addition to our industry-leading PUE, we’re completely transparent about the energy performance of the data center. The Client Portal gives every client full visibility into the performance of their data center. The dashboard provides high-level and in-depth views of key performance indicators, in real time and historical. Energy KPIs that clients have transparency into include partial PUE (PUE for their data center footprint) in real-time and historical, cost per kWh, and peak power usage history per site or across multiple locations.
Question #4: What rent escalation and power escalation is built into the contract?
Costs go up over time, so sensibly colocation providers build an annual cost increase into the contract. Typically, the cost increase associated with the rent (“rent escalation”) is 2-3%. Providers also typically build in a metered power cost escalation (“power escalation”), typically 3-5%, to account for rising utility rates. (That is another reason why the cost savings associated with a low PUE add up over time; with a lower PUE, the added cost each year is lower.)
Question #5: What are the renewal terms at the end of the contract?
You won’t hear very many colocation providers (if any) say this, but the best time to negotiate renewal terms is before you’ve signed the contract – because that’s when you have the power. After all, while a customer might spend $1.8 million a year for a 1 MW data center footprint, the investment required to install IT infrastructure in a data center is easily 10 times that much. It is a much more expensive proposition to move once you’re already in than to do all your due diligence at the outset.
Renewal terms can vary widely depending on the customer and the provider. Most commonly the terms fit into one of two categories, with a wide range of variations on the two:
- “Back to market rate” such that at the end of the contract any renewal is negotiated based on market rates at the time. In this scenario, rising market rates advantage the provider, but falling market rates advantage the customer.
- “Fixed option” such that the customer has the option to renew based on the rate paid during the last year of the contract. In this case, rising market rates advantage the customer, and falling rates advantage the provider.
Colocation costs are so often higher than expected because of a lack of transparency around how costs are actually determined, and a lack of flexibility to tie the data center capacity a customer is paying for to the capacity they actually need. That lack of transparency and inflexibility constrain customers’ ability to move fast. Yet moving fast is exactly what today’s economy demands. So the right data center can help IT leaders thrive, responding to changes in the business and adjusting to changes in technology. You deserve a colocation provider that’s as dynamic as your business.