Small & Mid Size Companies Pursuing a Mixed Data Center Strategy

Outsource-vs-In-House1To hear some of the hype surrounding the cloud, one might easily conclude that businesses at all levels are abandoning data centers en masse to gain the benefits of outsourcing. A survey by Forrester Research of mid-market businesses (“Mid-Market Data Center Purchasing Drivers, Priorities, And Barriers”), however, finds that many companies operating data centers—far from looking for a way out of the traditional model—are continuing to rely on, and are even planning to increase, privately owned infrastructure. In addition, the survey findings indicate that some of the touted benefits of outsourcing are actually barriers.

The SMB Data Center Lives

Data centers are capital-intensive projects, so naturally in light of overenthusiasm regarding the cloud, one might think that small to medium-size businesses (SMBs) would jump at the opportunity to outsource. The Forrester study, commissioned by Digital Realty and conducted during the first two months of 2014, surveyed almost 250 “senior-level North American decision makers with responsibility for data centers at midmarket firms with up to $500 million in revenue.”

In this segment, just over 40% of participants rely on four or more data centers, whether company owned or outsourced to some extent (e.g., colocation or hosting). Almost 80% rely on at least two. Just over half claimed over 2,000 square feet of data center space, and 31% were under 1,000 square feet. The ownership picture was somewhat mixed, with 54% of respondents owning their primary data centers and 32% fully outsourcing. Some 21% rely on the cloud for their primary infrastructure.

Roughly half of decision makers expected spending on data center facilities to increase by at least 5%, with almost 90% expecting it to either increase or remain level. Although these numbers seem fairly positive, the 40% of respondents expecting data center spending to remain flat may suggest some lingering wariness regarding the economic outlook. Only some 9% of respondents expected spending to rise more than 10%.

With regard to future infrastructure plans (where companies selected all applicable options), 33% of companies in this market intend to build private data centers, and 30% plan “traditional build[s] with a provider.” Only 22% planned cloud deployments, and 28% planned fully outsourced alternatives.

In light of these numbers, the middle market is far from seeing a mass exodus from private data centers. Although, naturally, some companies are looking to the cloud for part (or, in some cases, perhaps all) of their IT needs, the notion that a few major cloud providers will supply virtually all IT resources appears to be bunk. But over-optimism about the cloud is crashing, if Gartner is correct: that firm’s “hype cycle” for 2013 places cloud computing very near the bottom of the “trough of disillusionment.” Gartner expects a more solid footing for cloud computing to be some two to five years away.

What’s Stopping Outsourcing?

If SMBs are still relying on company-owned data centers, the laundry list of outsourcing benefits—which often seems to paint the alternative as old-world nonsense—must be flawed at certain points in the eyes of decision makers. In responding to the study asking respondents to rank the top three “main barriers during the decision making of data center outsourcing” for their respective companies, security risk and exposure topped the list at 68% of respondents. This concern is unsurprising, as outsourcing adds more parties to the security mix, increasing the number of links in a security chain that’s only as strong as the weakest link. Furthermore, the cloud has—rightly or wrongly—been viewed as posing greater security risks than more-traditional IT approaches. But security wasn’t the only part of the story.

A perennial justification for outsourcing is lower costs. In some cases, these savings can and do materialize, but 65% of respondents to the Forrester survey cited rising expenses as a barrier. Some 30% of respondents listed this concern as foremost in their minds, with only 27% listing security as the top concern. Outsourcing shifts the mix of capital and operational expenses to primarily (or even exclusively) operational. Although a purely opex cost structure evens out expenditures over time and reduced or eliminates the need for capital (often meaning debt), it can still be the more expensive option in some cases. IT outsourcing is far from clear cut in this arena: although some companies can benefit from this approach (assuming they do it right), others may not. The survey results seem to reflect concern among decision makers that, claims of outsourcing proponents notwithstanding, cost savings isn’t exclusively in outsourcing’s corner.

Other barriers to outsourcing included regulatory compliance and lack of management oversight. In a related trend, when asked to rate the importance of various factors in evaluating new data center investments, 78% of the Forrester survey participants cited control of the facility as either important or very important. For compliance purposes, particularly in highly regulated markets like health care, finance, government and anything involving electronic payment processing, control of data and related resources is critical to keeping regulators satisfied. Outsourcing can complicate matters by adding a third party into the mix, potentially creating situations that lead to greater scrutiny by regulators or violations of the myriad regulations governing certain industries.

Growth Drivers

Factors driving growth in IT resource capacity (whether for in-house data centers or some level of outsourced infrastructure, such as colocation) among SMBs include consolidation (46% of respondents) as well as updating aging facilities (41%). Energy-efficiency improvements only garnered interest from a quarter of decision makers; green/sustainable energy sources were a factor for just 16%—a surprisingly low number. Need for more capacity (38%) and disaster recovery sites (29%) were fairly high on the list.

In addition to the aforementioned concerns in evaluating new data center investments, network connectivity and carrier availability ranked high among respondents, with 82% listing this area as important or very important. Although only 16% of participants cited green energy as a driver for needing more data center infrastructure, 61% listed it as an important factor in determining how to invest. Furthermore, 75% cited access to cloud or other partners as important factors, emphasizing the fact that SMBs are avoiding limiting themselves to single approaches, but are instead often following a mixed model that includes in-house facilities as well as outsourced infrastructure.

Conclusions

The Forrester study indicates strongly that SMBs are pursuing multiple avenues in their IT strategies, rather than being boxed into a single approach. Although the cloud and other outsourcing methods are playing a role, the in-house data center remains a strong component for many middle-market companies as well. The cloud may yet have some maturing to do, but even at its peak, it’s unlikely to completely replace local data centers given the risk, cost and control concerns that many of these companies will probably maintain well into the future.

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About Five 9s Digital, LLC

Five 9s Digital is a data center real estate company offering data center development, investment sales, real estate advisory, and colocation and wholesale data center selection and procurement services. Five 9s Digital has been involved in the development and ownership of multiple mission critical facilities from single user build-to-suit facilities to multi-tenant data centers. Five 9s Digital brings a wealth of experience, background and expertise in providing solutions to the data center arena. Due to the specific and yet evolving requirements of mission critical end users in today’s world, Five 9s Digital is able to offer real solutions, real facilities, and real choices due its extensive and up-to-date knowledge base. Five 9s Digital is a Best Data Sites Certification Alliance™ member.
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