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Data Storage Biz Models: Which One is Right For Your Company?

Data reliance is increasing — and companies need to stay compliant. IT and finance should work together to choose which data storage business model makes sense, says Voices columnist Richard Blunk.

As our reliance on data increases so too does the global need for data storage.

Since neither trend shows any signs of stopping or slowing down soon, prudent information technology and finance professionals should work together in a thorough and thoughtful analysis of which of the following business models best address their company’s needs while working with the applicable financial constraints.

Businesses with large cash reserves or untapped financing capacity may want to build their own data centers in order to closely monitor mission-critical business operations while maintaining contractual and regulatory compliance. Companies that take this approach typically view data storage as a capital expenditure in their internal “build or buy” and “buy or lease” analyses.

LEGAL OBLIGATIONS

But, what about the small-to-medium company that collects and maintains sensitive data that it is legally obligated to protect, but is either unwilling or unable to incur the huge capital investment required to build their own data center? How can they determine which of the other data storage models is best for them?

Medium-sized companies with some internal information technology resources … should consider working with a wholesale data center that may have more storage capacity

Many smaller companies that want to minimize the associated operating expenses will frequently lease “rack space” in a co-location facility where they install their own computer equipment and conduct their own data storage operations with no involvement by the data storage provider.

Medium-sized companies with some internal information technology resources, on the other hand, should consider working with a wholesale data center that may have more storage capacity than is traditionally available in co-location facilities.

Companies with small capital budgets and no internal information technology personnel should consider working with a managed-services company that provides and operates its own data storage equipment to properly address the customer’s data storage needs.

Under this business model, the third-party data storage provider may also provide a variety of other administrative and engineering services. Commonly selected a la carte services include database and operating system administration, security and application management, disaster recovery, systems monitoring, and remote management.

RISK-ADJUSTED RETURN

A key requirement underlying all of these business models is the data storage company needs to generate an appropriate risk-adjusted return while recouping its infrastructure and equipment investments, if any, and passing along its operating costs to its customers. Expenses allocated to the customer may include costs related to the network, backup, archive, disaster recovery, platform, software maintenance, help desk support, and operational support personnel.

A key requirement underlying all of these business models is the data storage company needs to generate an appropriate risk-adjusted return … 

This certainly makes sense from the perspective of the data storage provider, but how does the potential customer make sure that it is not comparing apples to oranges when it tries to analyze the expenditures and costs associated with each of its available data storage options?  

COSTS AND CONTRACTS

While this need is clear, it is not as easy as one would hope or frequently, as one needs. A recent survey shows that not all data storage customers have an adequate understanding of their data storage costs. Anyone that has studied the invoices provided by many data storage providers will most likely agree.

Do we have better clarity from a review of the data center’s contract? Obviously, this step should be taken before signing an agreement with a third-party data storage provider. But once again, this exercise may not be as helpful as one would wish since it is often the case that the potential customer may still not have appropriate visibility into which costs it will be required to bear and how its portion of such aggregate expense will be allocated to it. 

Given these challenges, it may be helpful to focus on the key elements of these business models before reviewing the contract or invoices since this analysis should focus on determining which, if any, of the typical costs can be eliminated, or at least reduced. Companies that wish to “lease” and not “buy” this functionality, for example, may prefer the managed services business model since the cost of acquiring, operating, and maintaining the necessary computers can be spread out over the term of the lease.

By continuing to rely on its unparalleled record of successful innovation in technology and real estate, Dallas has become — and will continue to be — a national leader in this type of cutting edge data storage.

The needs of a potential tenant should also be considered. For example, if a credit-worthy company is willing to sign a long-term lease if the current data center is substantially upgraded, the data center operator may want to see if it could get additional financing to pay for this type of facility renovation.

As with all such decisions, the operator will want to pass this incremental financing cost to the new tenant in the form of increased rent. Some financing sources may find the assignment of such a long-term lease as a highly desirable new component of the available collateral package and providing this type of accommodation may make it easier to sign the new tenant, which will also need to assess whether the desired remodeling justifies this additional cost, if identifiable.

This additional cost — like many of the other expenses passed along to the customer — may not be readily or accurately determined. But there is hope on the horizon for those companies diligent enough to soldier on in this analysis.

STAYING CLOSE TO HOME

For example, many companies still want to maintain their data close to either their headquarters or their operations. Taking advantage of this growing trend, the data center operator should not incur the very significant telecommunications expenses that data centers that operate much farther away from their customers face. As a result, this type of business model may not require its customers to pay their allocated portion of such charges, which can represent a very large “plus” for this approach.

Others may emulate this model or devise other business models that enable data storage customers to better predict and control their data storage operating costs — especially as data storage becomes more of a commodity. Outsourcing this key function to third-party providers under any of the business models discussed above will require appropriate due diligence review of the data storage company’s physical security and legal compliance before signing any agreement.

By continuing to rely on its unparalleled record of successful innovation in technology and real estate, Dallas has become — and will continue to be — a national leader in this type of cutting edge data storage.


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Richard A. Blunk is a contributor to Dallas Innovates as well as managing director and general counsel of Thermopylae Ventures, LLC, a Dallas-based alternative investment firm with interests in altern(...)

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