As Colo Providers Change How They Do Business, Customers Benefit

As more and more revenue shifts to the cloud, colocation companies find more ways to assist their customers.

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Sean Brady is Managing Director for Cushman & Wakefield’s Global Data Center Advisory Group.

The proliferation of cloud data services is sparking change in the colocation space, as providers seek new strategies – to both survive and thrive – in the face of “virtual” competition. For companies looking at best practices for storing and accessing data, and considering a transition to cloud, these shifts are well worth noting before making a move.

Colocation providers understand that the cloud is slowly but surely gaining traction on a wide variety of services. From a dealmaking perspective, we are seeing two main transactional categories. First, existing colocation tenants are opting for short-term renewals as they move to cloud. Second, corporations that previously maintained in-house data centers are moving into colocation facilities with the intent to downsize their number of racks in phases as they move their data to the cloud. Then there are other tenants who skip the colocation phase and go straight to the cloud and find it more expensive than owning their own site. These users are finding cloud to be expensive and that is mostly because of how the user operates and manages the cloud service.

So, already, providers are seeing a reduction in the number of users keeping their racks in colo facilities – and that trend will continue. The fact is that cloud will become easier and less expensive to use, and cloud services will continue to evolve and be more comprehensive. The result? Colos are adjusting how they do business, and that change centers on becoming better partners for their clients. Here's how they're going about it:

  • Flexibility – The right data center provider allows you to transfer your spend over the term of your agreement as your needs evolve, with no penalty.  Working with providers who have portability allows you to allocate your contracted spend as needed between various services including data center locations, from colo to cloud, trading space for services, and more.
  • Cloud Connectivity – Colocation providers are incorporating tech innovations. This includes new cloud connectivity services – such as Megaport, PacketFabric and Console – that enable corporate users to run secure lines from their server to more than 300 different cloud providers, where the user can connect to these services in minutes through the provider's portal. Some of the bigger colos are even partnering with these service providers to white-label their services. Others are creating their own internet exchanges with access to the cloud.
  • Strategy Consulting – Studies are showing that most corporations using the cloud today are doing so inefficiently – and they are spending more than they should. There are a few colo providers now offering services and software to help clients evaluate their cloud usage and create strategies to better leverage this platform moving forward. Some are even hiring in-house cloud architects to work with their customers. In a recent conversation, a leading colocation executive remarked that if a business goes to the cloud through a colo operator that has the proper tools, it could save as much as 35% over that same business going to the cloud directly.
  • Eliminating Overprovisioning There are colo providers who work with clients who are planning to go to the cloud and need to reduce space, power and connectivity in their cage.  The colo provider works with the client by shifting their spend to managed services, remote hands, hosted private cloud, connectivity and DDoS Migration.  These services help eliminate overprovisioning and it helps the client get the right space and power it needs.
  • Lease Flexibility and Rent Portability – Embracing the philosophy that something is better than nothing, many colocation providers are structuring leases that anticipate a reduced revenue stream. First, they are offering rent portability into the cloud. For example, a client with a current $50,000 monthly spend in a colo may plan to move $10,000 to the cloud and this will allow the user to save approximately $8,000 of the $10,000 spend. This is not a dollar-for-dollar reduction, but it is a significant reduction in monthly spend. We are seeing rent portability within colocation spaces as well. If a company with a current $100,000 monthly lease on the East Coast wants to move half of this to a West Coast facility with the same colo provider, the operator is likely to accommodate that (provided the client pays for any incremental differences in the local rental rate, build-out of the new space and associated migration costs).  This rent portability move is closer to a dollar to dollar exchange except the transaction cost.

As part of this enhanced operational model, colocation providers also are becoming far more transparent in terms of services and billing. Where in the past, a provider might not alert a client who was paying monthly for an unused power circuit or cross connect, today they are bringing it to their attention and helping pinpoint other inefficiencies.

Simply put, colos are recognizing that superior service has become a mandate to competing effectively and slowing down the progression of corporations choosing a direct, cloud-only solution. That, in turn, is creating significant benefits for businesses and good reason for them to consider the advantages of working with a colocation provider’s architect and accessing the cloud by using the provider’s tools that help them use the service more cost effectively and to find the right balance for their specific data storage colocation and cloud access needs.

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