Victoria Galdina
Head of Finance at Linxdatacenter
21.01.2022

Data centers by the numbers: To build or to rent?

Nowadays, big businesses have to determine whether to build their own data center or avail themselves of the services of data center providers. For the most balanced and high-quality assessment, it’s important to clearly understand a data center’s financial model.

Data centers by the numbers: To build or to rent?
Victoria Galdina, Head of Finance 

Nowadays, big businesses have to determine whether to build their own data center or avail themselves of the services of data center providers. For the most balanced and high-quality assessment, it’s important to clearly understand a data center’s financial model.

Developing a financial model is part of the preparatory stage of any data center construction project. The other things include market analysis, choosing a location, identifying utility connection options, and obtaining all the required permits.

It's important to mention that every big business faces the choice of building their own data center or renting one from a provider. For SMB companies, it doesn't make economic sense to develop their own data centers.

Think for yourself, decide for yourself

As a first step, let's make a brief SWOT analysis of running your own data center versus renting one.

There are several advantages to running your own data center. First of all, you have complete control over the data center, its IT infrastructure, and other engineering aspects. Also, it gives you a certain independence in terms of the price compared to using a commercial data center.

Possible opportunities for site expansion are another advantage for running your own data center. In the long term (8 to 12 years), it might become a profitable undertaking from a financial point of view. However, return on investment is not guaranteed due to risks such as reallocating funds from your core business to the construction project, maintenance, and further data center development.

There are also disadvantages to running your own data center. The construction site may require substantial financial and labor resources, and in most cases you’ll have to purchase equipment from abroad, so you’ll find yourself depending on currency exchange rates. Moreover, attracting bank financing leads to an increase in the debt /EBITDA ratio,and as a result, your business ends up involved in a long-term investment project with the associated potential pitfalls and risks.

One advantage of renting IT infrastructure and services from data center providers is a guaranteed SLA. The entire responsibility for the performance of the engineering infrastructure is on the data center provider. The company renting it doesn’t need to bother about it.

It is important to mention that renting a data center allows you to avoid significant one-time capital expenditures. Consequently, there is no need to attract additional financial resources from banks or reallocate your own funds from developing your core business.

The downside of working with a commercial data center is that you’ll be dependent on them in terms of pricing and rack availability. For instance, say you’re eager to scale your IT infrastructure, but there are no racks available in the data center, and the price for new racks is higher than it was before. You should consider this possibility and plan accordingly to minimize the potential impact.

Still, if you establish a productive and mutually beneficial relationship with a data center provider, you’ll have a chance to focus on your core business. In this light, lacking full control over the infrastructure doesn’t seem like a critical threat. 

The data center financial model 

A company building a data center needs to understand what the project looks like from a financial point of view. A data center financial model usually consists of several blocks.

— CAPEX  is the main parameter of financial modeling, requiring special attention.

— COGS (cost of site operation) is a cost structure comprising electricity and utility systems maintenance. For accurate calculations, it is essential to determine the average load per rack, the PUE (the ratio of the total data center electricity consumption to the IT equipment electricity consumption), and the cost of 1 kWh.

- Revenue: This parameter is relevant for commercial data centers. For a company planning to build an enterprise data center, it is necessary to determine the alternative cost of renting racks from the provider to calculate the return on investment (RoI) of the construction project.

— SG&A (Selling, General & Administrative expenses) is a set of parameters including salary with payroll accruals, marketing costs, property tax, land tax, office maintenance, and various office licenses.

Capital expenditures structure

CAPEX – is the starting point for financial modeling. These calculations must be treated with the utmost care. This is the basis of the entire project, the guarantee of its future financial health.

Typically, data center capital expenditures include land acquisition, power connection, engineering, pre-construction,construction, engineering infrastructure, racks, and power distribution units (PDUs).

The main share of capital expenditures is equipment costs, mostly data center engineering infrastructure (about 70% of the total investments). The equipment cost is tied to the exchange rate, so currency exchange risks should also be considered in the course of the financial model development.

For example, a financial model developed at the beginning of 2020 differs significantly from one developed these days. The euro to ruble exchange rate has grown by 30%. At the same time, it is worth mentioning that the rack renting cost has not changed so dramatically. Therefore, it is important not to fix values in rubles in the process of financial modeling, but to test the model, including changes in the exchange rate.

The peak in terms of costs will be the second year, which involves the main construction work and equipping with utility systems. Deployment usually takes place in the third year of the project.

While developing a financial model, you can use existing market research as a reference, including the data relating to the capital expenditures per rack and per megawatt. These parameters can be adjusted on completion of the design stage of the construction project.

Если говорить об основных показателях финансовой эффективности, то в среднем срок окупаемости проекта составляет 7-11 лет, показатель IRR (внутренняя норма доходности) – 18-25%.

It is also essential to know that currently, banks are prepared to finance data center construction projects for 7-10 years with a grace period of up to 2 years. They prefer to invest in data center construction projects only after the investor provides their investment share (5-7%). Banks can finance up to 70% of the project.

Summary

Datacenter financial modeling is the primary stage of any big business investment project related to a company's IT strategy. During the process of financial model creation, multiple scenarios of companydevelopment and forecasts of global and national economic dynamics should be considered.

The financial model will also help you understand whether your company’s financial situation favors launching such a challenging and complex project,or whether it's better to share responsibilities with a data center provider and focus on core business development. 

A complete understanding of your current business needs and challenges, industry trend analysis including global technology trends, consumption patterns, and threats, and an assessment of your company's capabilities will help you make the right decision.

There is a rule of thumb that’s widely accepted in the industry: if a company's current and future business needs can be satisfied with less than 1,000 racks, it shouldn't invest in its own data center.

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How we optimized customer data center management

Data center is a complex IT and engineering object, which requires professionalism at all levels of management: from managers to technical specialists and executors of maintenance works. Here's how we helped our client put operational management in corporate data centers in order.
 

Taras Chirkov, Head of Data Center in St. Petersburg  in St. Petersburg 

Konstantin Nagorny, chief engineer of data center in St. Petersburg.  in St. Petersburg 

Data center is a complex IT and engineering object, which requires professionalism at all levels of management: from managers to technical specialists and executors of maintenance works. Here's how we helped our client put operational management in corporate data centers in order.  

Management is in the lead 

The most advanced and expensive IT equipment will not bring the expected economic benefits if proper processes of engineering systems operation in the data center, where it is located, are not established.  

The role of reliable and productive data centers in today's economy is constantly growing along with the requirements for their uninterrupted operation. However, there is a big systemic problem on this front.  

A high level of "uptime" - failure-free operation of a data center without downtime - depends very much on the engineering team that manages the site. And there is no single formalized school of data center management.  

And there is no single formalized school of data center management.    

Nationwide  

In practice, the situation with the operation of data centers in Russia is as follows.  

Data centers in the commercial segment usually have certificates confirming their management competence. Not all of them do, but the very specifics of the business model, when a provider is responsible to the client for the quality of service, money and reputation in the market, obligates them to own the subject. 

The segment of corporate data centers that serve companies' own needs lags far behind commercial data centers in terms of operational quality. The internal customer is not treated as carefully as the external customer, not every company understands the potential of well-configured management processes. 

Finally, government departmental data centers - in this regard, they are often unknown territory due to their closed nature. An international audit of such facilities is understandably impossible. Russian state standards are just being developed.  

This all translates into a "who knows what" situation. "Diverse" composition of operation teams composed of specialists with different backgrounds, different approaches to the organization of corporate architecture, different views and requirements to IT departments.  

There are many factors that lead to this state of affairs, one of the most important is the lack of systematic documentation of operational processes. There are a couple of introductory articles by Uptime Institute which give an idea of the problem and how to overcome it. But then it's necessary to build the system by your own efforts. And not every business has enough resources and competence for that.  ⠀⠀  

Meanwhile, even a small systematization of management processes according to industry best practices always yields excellent results in terms of improving the resilience of engineering and IT systems.  

Case: through thorns to the relative order 

Let's illustrate by the example of an implemented project. A large international company with its own data center network approached us. The request was for help to optimize the management processes at three sites where IT systems and business-critical applications are deployed.  

The company had recently undergone an audit of its headquarters and received a list of inconsistencies with corporate standards with orders to eliminate them. We were brought in as a consultant for this as a bearer of industry competence: we have been developing our own data center management system and have been educating on the role of quality in operational processes for several years.  

Communication with the client's team began. The specialists wanted to get a well-established system of data center engineering systems operation, documented on the processes of monitoring, maintenance and troubleshooting. All this had to ensure optimization of the infrastructure component in terms of IT equipment continuity.  

And here began the most interesting part.  

Know thyself 

To assess the level of data centers in terms of compliance with standards, you need to know the exact requirements of the business to IT systems: what is the level of internal SLA, the allowable period of equipment downtime, etc.  

It became clear right away that the IT department did not know exactly what the business wanted. There were no internal criteria of service quality, no understanding of the logic of their own infrastructure.  

Colleagues simply had no idea what the permissible downtime for IT-related operations was, what the optimal system recovery time in case of a disaster was, or how the architecture of their own applications was structured. For example, we had to figure out whether a "crash" of one of the data centers would be critical to the application, or if there were no components affecting the application.  

Without knowing such things, it is impossible to calculate any specific operational requirements. The client recognized the problem and increased coordination between IT and the business to develop internal requirements and establish relationships to align operations.  

Once an understanding of the IT systems architecture was achieved, the team was able to summarize the requirements for operations, contractors, and equipment reliability levels.  

Improvements in the process 

Our specialists traveled to sites to assess infrastructure, read existing documentation, and checked the level of compliance of data center projects with actual implementation.  

Interviews with the responsible employees and their managers became a separate area of focus. They told what and how they do in different work situations, how the key processes of engineering systems' operation are arranged.  

After starting the work and getting acquainted with the specifics of the task the client "gave up" a little: we heard the request "just to write all the necessary documentation", quickly and without deep diving into the processes.  

However, proper optimization of data center "engineering" management implies the task to teach people to properly assess the processes and write unique documentation for them based on the specifics of the object.  

It is impossible to come up with a working document for a specific maintenance area manager - unless you work with him at the site continuously for several months. Therefore this approach was rejected: We found local leaders who were willing to learn themselves and lead their subordinates.  

Having explained the algorithm of documents creation, requirements to their contents and principles of instructions ecosystem organization, for the next six months we controlled the process of detailed writing of documentation and step-by-step transition of the personnel to work in a new way. 

This was followed by a phase of initial support for work on the updated regulations, which lasted one year in a remote format. Then we moved on to training and drills - the only way to put the new material into practice.  

What's been done 

In the process, we were able to resolve several serious issues.  

First of all, we avoided double documentation, which the client's employees feared. To this end, we combined in the new regulations the regulatory requirements applied to various engineering systems as standard (electrics, cooling, access control), with industry best practices, creating a transparent documentation structure with simple and logical navigation.   

The principle of "easy to find, easy to understand, easy to remember" was complemented by the fact that the new information was linked to the old experience and knowledge of the employees. 

Next, we reshuffled the staff of service engineers: several people turned out to be completely unprepared for the change. The resistance of some was successfully overcome in the course of the project through the demonstration of benefits, but a certain percentage of employees turned out to be untrained and unresponsive to new things.  

But we were surprised by the company's frivolous attitude to its IT infrastructure: from the lack of redundancy of critical systems to the chaos in the structure and management.  

In 1.5 years the engineering systems management processes have been pumped up to the level that allowed the company's specialists to successfully report "for quality" to the auditors from the headquarters.  

With the support of the operating component development pace the company will be able to pass any existing certification of data centers from leading international agencies.  

Summary 

In general, the prospects of consulting in the field of operational management of data centers, in our opinion, are the brightest.  

The process of digitalization of the economy and the public sector is in full swing. Yes, there will be a lot of adjustments in the launch of new projects and plans for the development of old ones, but this will not change the essence - the operation should be improved at least to improve the efficiency of already built sites.  

The main problem here: many managers do not understand what thin ice they are walking on, not paying proper attention to this point. The human factor is still the main source of the most unpleasant accidents and failures. And it needs to be explained.  

Government data center projects are also becoming more relevant now and require increased attention in terms of operations: the scope of government IT systems is growing. Here, too, the development and introduction of a system of standardization and certification of sites will be required.  

When the requirements to public data centers in Russia at the level of legislation will be reduced to a standard, it can be applied to commercial data centers, including for the placement of public IT resources.  

The work in this area is ongoing, we are participating in this process in consultation with the Ministry of Digital and by building competencies for teaching courses on data center operation at the ANO Data Center. There is not much experience on such tasks in Russia, and we believe that we should share it with colleagues and clients. 

Data centers by the numbers: To build or to rent?

BEST, money transfer and payments operator

business challenge

The customer faced a technical issue with a persistent BGP session flag with Linxdatacenter hardware. We examined the problem and found out that one of customer’s hosts was under a DDoS attack.

Because of the distributed nature of the attack, traffic couldn’t be filtered effectively, and disconnecting the host from the external network wasn’t an option. The attack stopped after changes in the server configuration, but resumed the day after. A 5.5 Gbps attack overloaded the junctions with internet providers, affecting other Linx Cloud users. To mitigate the effects of the attack, we employed a dedicated DDoS protection service.

Solution

To ensure the continuous availability of resources hosted in Linx Cloud, we rerouted all the customer’s traffic through StormWall Anti-DDoS system. The attack was stopped within half an hour. To prevent future cyberattacks, we organized all connections to the customer’s resources through the StormWall network.

client:

BEST, money transfer and payments operator

business challenge

The customer faced a technical issue with a persistent BGP session flag with Linxdatacenter hardware. We examined the problem and found out that one of customer’s hosts was under a DDoS attack.

Because of the distributed nature of the attack, traffic couldn’t be filtered effectively, and disconnecting the host from the external network wasn’t an option. The attack stopped after changes in the server configuration, but resumed the day after. A 5.5 Gbps attack overloaded the junctions with internet providers, affecting other Linx Cloud users. To mitigate the effects of the attack, we employed a dedicated DDoS protection service.

Solution

To ensure the continuous availability of resources hosted in Linx Cloud, we rerouted all the customer’s traffic through StormWall Anti-DDoS system. The attack was stopped within half an hour. To prevent future cyberattacks, we organized all connections to the customer’s resources through the StormWall network.

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