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Study: Data center outsourcing increases; most happy with results

Data center outsourcing in the midmarket outpaces that of enterprise companies and the practice is poised to grow, a study says. Meanwhile, providers are increasing capacity.

Data center outsourcing is on the upswing and a recession economy is only one reason. A recent study from research and advisory firm Computer Economics Inc. shows that more companies plan to increase rather than decrease their data center outsourcing and most are pleased by the results. Another telling sign? Data center providers are expanding facilities and adding services (see box).

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Data center outsourcing grows in popularity among midsized firms
First, some hype control. The whole world is not going to start outsourcing data centers overnight. The percentage of companies that entrust some part of their data center operations to third-party providers has hovered around 33% in recent years, according to Computer Economics survey data. But an uptick of 3 percentage points in 2008 (from 32% to 35%, an increase of 9%) is a harbinger of greater growth to come, the firm believes.

In addition, of organizations that already outsource, more are increasing their data center outsourcing than decreasing it, says Irvine, Calif.-based Computer Economics. Of the more than 200 respondents to the March 29 survey, 28% of organizations intend to increase their amount of data center outsourcing, compared with the 7% that are looking to scale back (65% said they will maintain current levels).

Moreover, the outsourcing experience has been overwhelmingly positive. Eighty percent of respondents said their providers met expectations, while 12% said providers exceeded expectations. The 8% who expressed dissatisfaction pretty much matched the percentage of respondents who intend to cut back on outsourcing services.

The findings are echoed by other market watchers. Stamford, Conn.-based Gartner Inc. has noticed a sharp rise in inquiries about data center outsourcing, particularly among companies that bring in $500 million to $1 billion in revenue. And Forrester Research Inc. analyst Galen Schreck published a report this month noting an upswing in inquiries from IT end-user professionals about alternatives to data center expansions.

More midmarket companies outsourcing

Who is outsourcing the data center? Midsized organizations ($350 million to $1 billion in revenue) are more interested in outsourcing their data centers than

Data center outsourcers expand
Another sign of growth in data center outsourcing is the spate of service providers adding capacity and services, said Computer Economics. The list includes:

  • Rackspace Hosting Inc.'s plan for a new data center facility in Virginia;
  • Hewlett-Packard Co.'s announcement last year that it would purchase EDS for $13.9 billion; and
  • Tata Communications Ltd.'s plans for new Tier 3 data center space in London to support its expanded managed services business in Europe. -- L.T.
  • either large ($1 billion or greater) or small organizations, according to the Computer Economics survey. Nearly 40% of midsized companies outsource at least some part of their data center operations, compared with 31% of large organizations and 34% of small organizations. However, the midmarket uses outside help judiciously -- only 36% outsource at least half of their data center operations.

    The most aggressive outsourcers are small organizations, with more than half relying on third parties for at least 50% of their data center operations. Large organizations are nearly as eager (45%) to let third parties do half of their processing, reflecting the need in both segments to scale data center capacity up or down quickly. But while small companies turn to third-party providers for computing services they cannot afford to build themselves, large companies typically hope to take advantage of an outside provider's economies of scale to reduce the cost of delivering data services, according to the survey.

    Midsized companies fall somewhere in the middle: They are big enough to provide their own data centers but are starting to look for delivery models that can cut the cost of data services.

    Impact of data center outsourcing on IT spending

    As for whether data center outsourcing reduces IT spending overall -- well, the jury is out, says Computer Economics.

    The survey data showed that organizations with a high level of data center outsourcing (more than 50%) spend as much of their revenue on IT -- 1.4% -- as organizations that do no outsourcing.

    An uptick in the number of companies outsourcing the data center in 2008 (from 32% to 35%, an increase of 9%) is a harbinger of greater growth to come, Computer Economics believes.
    But the report cautions against reading too much into this finding. First, spending on IT varies by industry and company. Financial services companies, for example, spend more on IT as a percentage of revenue than other sectors and also exhibit high levels of data center outsourcing, suggesting that organizations with the most intense IT operations also tend to do the most outsourcing as well.

    In addition, the heaviest users of data center outsourcing also have the most complex and heterogeneous computing environments. Outsourcing may be their strategy for bringing data center costs in line with industry norms. Finally, outsourcing the data center at a lower cost than managing it oneself may free up IT budget dollars that go to keeping the lights on (70% is the norm) for more strategic projects. In these instances, the percentage of company revenue spent on IT would not change, but outsourcing would certainly have an impact on IT spending and, presumably, IT's impact on the organization.

    Indeed, Computer Economics concludes that there are plenty of strategic and technological trends favoring an increase in data center outsourcing.

    "While the evidence as to whether outsourcing reduces IT spending over the long run is unclear, the promise of cost predictability and operational flexibility should provide plenty of motivation for organizations that need extra capacity in the short run, particularly in the face of capital constraints," the report states.

    Let us know what you think about the story; email: Linda Tucci, Senior News Writer

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