Negotiation Strategies in Data Center and Colocation Agreements

Data center and colocation service agreements are some of the most expensive real estate commitments made by companies. While these agreements are typically priced on a “cost per kwh” basis, converting this pricing structure into “per square foot” like traditional commercial office space can help companies understand their financial impact.

When converted, you will find the “per square foot” cost to be 3 to 5 times more expensive than the priciest Midtown Manhattan Class A high-rise. As a result, it is critical to develop a strategic negotiation strategy when entering into data center and colocation services agreements with landlords.

It has been estimated industrywide that more than 50% of these mission critical projects are done in-house by the data center customer’s IT team and without any outside consultants. This statistic varies drastically from commercial real estate searches where over 85% of these projects use outside expertise throughout the process. From the initial site selection through the on-site evaluation to the final agreed terms, the in-house IT team is charged with all of the complex details to meet its projected requirements. 

Yet, except for the necessary components of space, uptime and power, these high exposure agreements are minimally negotiated. The negotiating leverage involves shopping among data center and colocation providers and understanding competitive service-level agreements. 

With proper planning and an aggressive approach, corporations can achieve significant cost savings when obtaining a new site or renewing an existing facility. The concept of “if you don’t ask, you don’t get” applies. The following will describe some situations a corporation should pursue well in advance of the final wrap-up of the agreement.

Leverage multiple third party providers during negotiations

Economic necessities require more and more companies to put their trust into the hands of a third-party enterprise data center provider. First and foremost, the customer must be satisfied with the redundant infrastructure the third-party facility can provide to meet its requirements, though the choices have increased. Most Tier 1 metropolitan markets now have 12 to 30 or more possible providers offering enterprise class raised-floor environments. These competitors consist of excellent global, national and regional developers with well-designed facilities in well- vetted locations. 

“While the customer tends to focus on choosing a few too-big-to-fail operators, we recommend keeping at least four candidates throughout the tour and RFP process, well into the negotiation process,” explains Michael Rareshide, Executive Vice President of Site Selection Group, who negotiates mission critical and colocation projects for data center users. “Too often, customers narrow their preferred option too soon, but if they keep a few more finalists in the mix, the additional leverage can usually result in 8% to 24% savings from the initial proposal.”

Multisourcing colocaton providers 

What should also be considered is the possibility of multisourcing colocation providers. The corporate customer is then able to take advantage of the marketplace without being locked into one vendor. The company can also benefit from the niche strengths of each operator, leveraging their capabilities.  

“As the growth of multisite rollouts continues”, says Rareshide, “the customer benefits from the flexibility without being tied to one vendor, which then translates to economic savings.”

Managed services

All areas that may be required by the data center customer, such as monitoring tools or cloud hosting, should be negotiated. The customer will be committing to a defined initial electrical load — which could be significant — in a raised-floor or powered-shell environment, so it is a good idea to request these services at a reduced or fully abated basis over the agreement term.

Start-up, expansion and contraction scenarios

Properly negotiated well in advance of finalizing the SLA, these areas can be designed in the customer’s favor. The customer’s ramp-up period to full capacity may take several months. Such concepts as a discounted license fee period that is based upon the power being used can shave the economics to coincide with when the facility is fully operational. A more effective scenario is to agree to a license fee abatement for 60 to 90 days and then allow for a discounted license fee through an initial 12-month period. Thus, the savings would not be based upon the customer’s timing of full operation, which may be well prior to this discounted period.

If the customer has underestimated its capacity needs or has unclear future power needs, expansion rights can be critical. To need additional power after the SLA in place without clear definition in the agreement puts all the leverage into the operator’s hands. The expansion right in the SLA needs to include:

• The additional power committed by the operator without paying any “reserved power” fees.
• The defined “price per kwh” fixed.
• A reasonable time period (up to 12 months) to exercise this right.

The reverse is also true should the client overestimate its defined power, whereby some percentage can be put back to the operator within a reasonable time period.

The data center customer has a lot of influence in the deal. And as such, many of these factors are open for discussion. While the negotiations of these complex SLAs comprise hundreds of decisions and considerations, just utilizing a few of these tactics can provide the client some material savings with no discernable lack of service from the third party data center operator.