Third party data centers

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Running a data center isn’t for the faint of heart. Is the third party data center market the answer to this? Jasmine Desai takes a look at how this slice of the market is set to grow in India and what you should know before you opt to outsource your IT infrastructure

Today, there’s a tremendous amount of third party data center build out happening in India. Are providers taking a leap of faith by building huge facilities or are companies really queuing up to utilize these facilities? To provide a perspective, according to an IDC report in 2011, third party data center  services are expected to reach $671 million by the end of 2012, growing annually by 36.5%. The Indian data center market is forecasted to be worth around $2 bn by the end of 2011 and the third party data center portion of it is estimated to account for 25-30% of that. According to IDC, the third party data center space in 2009 stood at 2 mn sq. ft. and it was estimated to grow at a CAGR of over 30% to reach around 9 mn sq. ft. by 2014. The massive build out exemplified perhaps by Tulip setting up the third-biggest such facility in the world in Bangalore is all part of this trend.

The rationale

Managing a data center is tricky at the best of times. According to Sunil Gupta, President and COO, Netmagic Solutions, “Managing data centers is a complex business. It involves technology, people and processes, which become more difficult to manage and less cost-effective with scale for an enterprise that’s managing it in-house.”

There are different flavors in data center outsourcing. The first is where the service provider provides basic facilities, power and cooling and the customer provides the equipment. In the second category of third party data centers, the service provider buys the equipment on a company’s behalf and charges for the usage of said equipment. The most mature category is one where there is a dedicated team of people that manages the customer’s equipment based on SLAs.

Prashant Gupta, Head of Solutions, Verizon Business India, commented, “It helps data center providers build a long term relationship with the end customer. It enables customers to meet their compliance requirements and other standards. It also helps clients focus on their core
business.” The key verticals that are adopting this model are BFSI, government, SMB and IT/ITES.  

U Nedunchezhiyan, Deputy General Manager – ICT, BIAL, commented, “Lowering the Total Cost of Ownership and gaining access to the best services with an agile IT setup are the key reasons behind opting for a third party service provider. With almost 60-70% of the allocated budget being spent on maintaining a data center, organizations are looking for alternatives to bring down this spending in order to have more capital available for innovation and business needs.” Leasing, purchasing or building a data center is a costly proposition for companies and, in an attempt to grab as much market share as possible, businesses are turning to third-party data center and co-location service providers.

From the vendor perspective, with central and state governments and bodies like the RBI clearly outlining guidelines for data storage, it has become easier to create solutions for these verticals. Today, companies are looking at third party data centers as an option for times when they need to expand, save cost, or even when there is a need for skill or technology upgrades.

According to Rakesh Kumar, Research VP, Gartner Inc., “The market in India is growing rapidly as compared to the rest of the world with the exception of China. If you look at floor space capacity, it is growing by 45-50% a year in India as against 10-12% in other countries. There is no reason as to why the pace should slow down. Many people are looking at India as a hub for the entire region and not just for serving their Indian customers.” Also, the rising trend of organizations wanting to utilize more Web and mobile services, is placing significant demands on data center facilities and their expansion.

According to an IDC study, expenditure by businesses on their captive data center build-outs and operations was $1,389 million in 2010, and would reach $1,937 million by end 2012, at an average year-on-year growth of 18.1%. There is a way to calculate ROI and the expectations that an organization can set when choosing to opt for a third party data center. According to Kumar of Gartner Inc, “It will take nine to ten years to pay back if we do the cash flow analysis.”

Enterprises get many benefits by looking at a service provider for their requirements. Gupta of Verizon said, “The cost savings can be segregated as direct (CAPEX and OPEX) and indirect costs that the enterprise incurs. CAPEX would be with regards to building power backup, cooling systems and owning the IT equipment based on the tenure of the project. OPEX would be for managing the infrastructure, power consumption, rental irrespective of the percentage of space utilized and for network redundancy that needs to be built in (the co-location site should have the facility to be connected via various network providers). The indirect costs would be with regard to the time required to set up the space to satisfy specific requirements, time to expand when the business grows etc.”

Service providers, apart from offering space to their end customers, are also providing various other services, which the customers can use as value added services that enable them to run their businesses smoothly. Some other services include IT equipment on rental, securing the infrastructure completely, storage options, shared services, etc.

Although it is quite difficult to generalize, as the cost varies from organization to organization, according to Atul Khatavkar, VP, IT Governance Risk Compliance of AGC Networks, “Considering all factors, one can definitely keep expectations of about 30% savings at a minimum.”

According to Prasad CVG, Chief Information Officer, ING Vysya Bank, “Third-party data centers are certainly a good thing to have as long as they come with redundant facilities for power and cooling etc. It provides a lot of benefits to companies in not needing to invest in building their own data centers as building data centers with sufficient redundancy in terms of power, cooling and hardware is an expensive affair.” Moreover, it also gives flexibility and reduces time to market when you want to go in for additional space for your infrastructure without going through the arduous process of renovating your current set-up. In some cases, while the primary data center is kept in a company owned set-up, a third-party data center set-up can be a good option for disaster recovery.

Navigating around third party centers

In spite of the benefits, potential customers are worried about the likelihood of data breaches or downtime. However, one can always find a way a round these issues by taking the necessary precautions.

In India, a lot of providers have built their facilities as per standards so that a data breach or downtime should not be an issue. Besides, this could happen in an internal data center as well. You can always engineer around downtime by having a DR contract for the primary site. E.g. if you have opted for a primary site in Hyderabad with a service provider like Ctrl S, you could also opt for a DR set-up at the provider’s Mumbai location. The practice of using third party data centers for DR is a trend that has taken off in the last 12-15 months in India.

The checklist to be considered before zeroing in on a third data center, according to Kumar of Gartner, is, “First and foremost, negotiate hard. Look across different suppliers and see who meets your needs better. You do not need to have the highest level of availability. Secondly, benchmark the service providers, look at their history and ask them for the downtime history etc. Negotiate for a period of five to seven years because, as demand increases and space reduces, the prices will go up.”

Remarking on a measure to look out for, Khatavkar of AGC Networks Limited commented, “The challenge remains with regards to the standards followed by various data center providers. However those that follow TIA guidelines can be seen as more reliable.” All-in-all, it is in their own vested interest that data center service providers should ensure that they deliver high quality services.

Gupta of Verizon Business said, “Service providers have matured in providing these services and they follow proper processes in order to ensure that the SLA that they have committed to end customers are met. For critical services, disaster recovery sites are set up with all the applications and data sequentially backed up.” For example, servers are provided with sufficient redundancy in terms of power, processing unit, storage (with backup and faster recovery from backups. For network connectivity, every data centers has arrangements with multiple network providers. Security concerns are addressed by providing the end customer with 24/7 video surveillance, manned security, caged area, multi level access control and authorized access.

Rajesh Rege, Senior Vice President- Data Center, Virtualization and Cloud, Cisco India & SAARC, said, “As network availability improves, data centers will move from high cost locations like Mumbai to low-cost locations in tier 2 or 3 cities.” Cloud adoption is also expected to boost the demand for third party data center services.

Gupta of Netmagic Solutions said, “Third party data center services are not only about great infrastructure, but about service and support.” Third-party data center service providers will continue to invest in building larger and more energy-efficient data centers in the coming years.

One piece of evidence that the market is all set for major expansion is that service providers from abroad are expanding in India. As per a blog post of Seepij Gupta, Associate Research Manager, Forrester Research, “Japan-based NTT Data recently took a step towards expanding its IT capabilities in India, acquiring a 74% stake in Netmagic Solutions. This marks another important event in the third-party data center services market in India. In early 2011, Tulip Telecom acquired a data center facility in Bengaluru at a value of approximately $46 million. This year, with this deal, NTT Communications not only gets access to Netmagic’s seven Indian data centers, a platform offering public, private and hybrid Cloud services, but also inherits the capability to address the fast-growing South Asia data center services market.”

It’s clear that third party data center providers are ramping up and with organizations in many sectors needing to keep their data in the country, providers with robust facilities in India stand to benefit. Massive scale will enable these providers to offer savings to their customers and the case for captive data centers looks weaker than ever.

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