When it comes to upgrading or acquiring data centers, a company’s total cost of operations (TCO) plays a pivotal role.
Businesses must estimate expenses associated with purchasing, deploying, upgrading, and simply using part or all of a data center.
Upgrades and repairs are necessary, however they can also become an enormous drain on cash if not carefully financed. Data center owners who want to keep their facilities equipped with top-of-the-line equipment without breaking the bank will benefit from understanding how equipment is being financed in today’s market.
KEEPING DATA CENTERS HIGH-GRADE
Data centers are made up of several complex moving parts that require state-of-the-art equipment to ensure optimal performance. Because data centers are such large-scale and critical facilities, it is imperative that each component functions seamlessly. There is little to no margin for error.
Because of these high-grade expectations, there is a significant amount of pressure that is put onto companies to keep their equipment and software upgraded. If the right financing isn’t in place, this pressure can result in overwhelming acquisition and maintenance costs for data center owners.
Further, there is tremendous competition in the data center sector. Some large companies with deep cash reserves can easily fund regular state-of-the-art upgrades, however most data center owners need to manage their cash strategically to keep equipment and software upgraded.
To compete, most data center owners will need to find a way to lower out-of-pocket costs of equipment upgrades, ultimately positioning themselves to maintain a high-grade facility while staying nimble.
HOW TO FINANCE EFFECTIVELY
Financing strategy can differ based upon the type, size, and lifespan of the data center equipment needed.
Equipment subject to rapid technological obsolescence or high maintenance costs towards the end of life should be financed with operating leases.
Operating leases allow companies to pay for equipment usage with no obligation to own it. Once the maintenance cost rises or the equipment is no longer needed, companies can replace it with newer equipment, rather than losing money trying to get rid of the outdated asset or spending cash trying to maintain upkeep.
For example, servers are at the core of a high functioning data center, and they need to be replaced with newer models regularly. The average lifespan of a data center server is between three to five years, and based on rapidly increasing changes
in technology, the true lifespan is much closer to the three-
As a result, data center owners typically choose to lease servers under one of the following:
Thirty-six month operating lease with month-to month renewal option. Under this scenario, the data center owner is able to lease the equipment for three years and then decide later to either return it or continue leasing on a month to month basis. What’s beneficial about this structure is that the lessee is able to defer the decision surrounding how long they will keep the equipment. They have the ability to make this decision up to three years from when the lease originally starts, rather than deciding upfront.
While data center owners may think that today’s equipment will work for them for up to four to five years, technology is changing so rapidly that there may be better, faster, and cheaper equipment on the market three years from now. In that case, the lessee can hand the equipment back and lease the newest technology. If it’s still useful for them, they can simply continue leasing on a month-to-month basis until the equipment is no longer working, or up until maintenance costs get so high that it needs to be replaced.
Forty-eight month operating lease. Under this scenario, the lessee will benefit from a slightly lower monthly payment during the initial three years than they would under the 36-month option. However, if new technology becomes available that would make a company’s leased equipment obsolete before the lease ends, the data center owner is still required to pay through the end of the lease before they can return the equipment to the lessor.
For example, if a data center owner is leasing on a four-year term, yet the equipment becomes obsolete after three years, the owner will still need to pay another 12 months before they can return it. As a result, this option is not ideal for companies trying to compete against groups who have the latest and greatest technology.
Alternatively, equipment with a long lifespan is best financed using permanent financing. Specific examples include:
Racking: This is particularly durable equipment, and can last 15 to 20 years or more depending on the durability of the metal itself.
Back-up generators: Guaranteed to be found in almost every data center, back-up generators have an extensive 10- to 15-year lifespan. Their purpose is to be used in emergency situations that are hopefully very rare, meaning that the machines are rarely used, resulting in a long life expectancy.
HVAC systems: These systems will last for an estimated 15 years.
A capital lease or loan is the most cost effective route for data center equipment with a long lifespan. Capital leases function like a purchase. They offer low rates and an opportunity to spread out the cost of equipment over several years. At the end of the lease term, data center owners are able to purchase the equipment for a nominal amount, typically $1.
As a result, the data center owner pays for the equipment monthly over the course of the lease rather than paying for it all up front, and is also able to depreciate the assets on their tax returns as if they paid cash.
REAPING THE BENEFITS
Overall, equipment lifespan is the most important aspect to consider when looking at finance strategies for data center assets. In order to stay competitive and remain profitable, data center owners need to understand finance options and make strategic decisions that will preserve cash and provide flexibility to upgrade equipment as needed.
To do this, data center owners should seek out a financial partner that understands the data center industry, and work with that partner to develop a plan that will keep each facility equipped with high-grade equipment.
The result will be a high-performing data center, combined with a lower TCO, a balance sheet that is not burdened with depreciating assets, and a positive impact on the bottom line.