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Economies of scale: How and why enterprises are outsourcing their data centers


Apr 13, 2023
Economies of scale: How and why enterprises are outsourcing their data centers


This article is part of a VB special issue. Read the full series here: Data centers in 2023: How to do more with less.

The data center is the bedrock of the insight economy. To be competitive, enterprises need IT infrastructure that can process data at scale, on a cost-effective basis. 

However, many organizations don’t have access to the internal expertise and resources they need to keep the data center performing at the highest level. This leads many organizations like Netflix to  look to outsourcing as a force multiplier. 

In fact, Forrester research finds that nearly 60% of organizations are looking to outsource or partner with a provider to transform their operations. This way, organizations can focus on daily innovation without getting sidetracked by the complexity of managing increasingly complex infrastructure. 

Many services can be outsourced to third-party providers. These can include hardware installation and maintenance, management of computing and storage resources, systems configuration, uptime management and monitoring of application and service performance. Also, database administration, backup and disaster recovery services, physical access control and incident response.


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Making data center insights cost-effective 

The main reason most organizations outsource the management of the data center is cost. Building and maintaining a data center is extremely costly, particularly for larger organizations that not only need to invest in physical space but servers, infrastructure, power, security access controls and specialist IT staff. 

As a result, many organizations turn to outsourcing as a way to lighten these costs without sacrificing their operational excellence.  

“Outsourcing is a very common business activity for enterprises of all sizes, across industries,” said Naveen Chhabra, Forrester principal analyst. “Tech leaders outsource for many reasons including staff augmentation, cost efficiency, strategic direction/alignment, ability to focus on its own strengths and innovation.”

The right partner, the right balance

The core financial argument for outsourcing management of the data center is that “outsourcing provides the ability to minimize upfront capital expenses, and benefit from the economies of scale that an experienced data center provider will offer,” said Leo Casusol, managing director of Forgepoint Capital.

Part of that involves renting secure and resilient infrastructure on an ongoing subscription basis at a predictable price that requires less initial investment. Although it’s important to note that this can come at the cost of control. 

“The right decision — whether to outsource or not — normally comes down to the tradeoff between control over direct hardware and customization capabilities versus the economic and operational benefits of relying upon a third-party provider,” said Casusol. “If an organization finds the right partner, the right balance can be achieved.”

Types of data center outsourcing 

At the same time, there are many different forms that outsourcing can take.

There are a few primary types of data centers, according to Brian Lewis, managing director of advisory at KPMG. These include individual client, managed service provider, cloud-based colocation and hyperscale computing.

“Each type of data center aligns with different business priorities and outcomes which adhere to one of four availability tiers; Tier 4 with 99.99.5% uptime to Tier 1 with 99.5% uptime,” said Lewis. 

The organization can choose which type, tier and associated services meet their priorities, outcomes and budgets. Facilities management, smart hands, IT operations, asset management and monitoring are all services that enterprises can pick and choose to outsource. 

Although, it’s important to remember that there’s no-one-size-fits-all solution, and organizations have the option to build services around their own own distinct use cases. 

“There is a high-level shift in outsourcing trending toward transformation-enabled deals that bring the right value at the right time,” said Lewis. “Traditional activity based, one-size-fits all, managed service models still exist in the market; however, organizations are increasingly looking for flexible, product and consumer centric contracts to support the needs of the varying needs of their business.”

Colocation as the go-to choice 

One of the most widely used examples of data center outsourcing is colocation. Data center colocation is where an organization will rent physical space from a third-party provider so they can store their hardware. 

Colocation enables organizations to “leverage existing data center facilities to rent space for closer proximity to major fiber routes,” said Ernest Lefner, chief product officer of network automation provider Gluware. 

“Colocation frees up the reliance on personal data centers from having to manage critical infrastructure, which can be some of the most difficult infrastructure to manage, move or relocate in the event of data center issues or closures,” said Lefner. 

Researchers valued the data center colocation market at $50.3 billion in 2021, and anticipate it will reach $159.8 billion by 2030. Key vendors in the market include Alphabet, Amazon, DXC Technology Co. and Equinix. 

Typically, colocated data center offerings provide temperature controlled, 24/7/365, secure highly-monitored environments populated by servers offering guaranteed performance and uptime. 

They are also a good option for organizations looking to reduce risk because they increase resilience against power outages or natural disasters — if a company’s primary site of operation goes down, there is still another site with IT infrastructure online. 

The limits of outsourcing 

Of course, outsourcing management of the data center does create new risks that security teams need to be prepared to confront.

“As with any outsourcing, data center infrastructure comes with increased supply chain risk,” said Claude Mandy, chief evangelist for data security at Symmetry Systems. “This includes the risk of unauthorized access to data and the challenge of securing data regardless of where it is in a hybrid cloud — including public cloud or on-premises. This has driven the focus on data encryption at rest, but more importantly requires organizations to monitor more carefully who is accessing their data.”

Ultimately, these risks are manageable if organizations commit to differentiating the security responsibilities of the provider from their own and implement adequate security controls and disaster recovery processes.   

The key to making this happen is to maintain active communication with third party vendors.

“Disaster recovery and business continuity plans need to be tested to include data center partners where the management has been outsourced,” said Morris. “Plans should be tested frequently and included in incident response plans for both cyber and disaster (fire, flood, tornado, hurricane, pandemic) contingencies.” 

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