U.S. presidential candidate and IT outsourcing industry founder Ross Perot once remarked, “The devil is in the details.” Though he wasn't the first to use this phrase, he repeated it to emphasize that much can go wrong between good ideas and their implementation. This is especially true in negotiating the nuances of colocation contracts after the parties have agreed to the most significant business points.
Skillfully negotiating colo contracts involves structuring both the business and delivery terms to meet your needs, but the final contract must capture those terms in clear, enforceable language.
The straightforward part of contract negotiation involves checking the draft of the colo provider’s contract against their proposed solutions as detailed in their proposal, which was discussed in Part 5 of this series. Most colocation contracts delineate the size of the physical space; how much critical power will be provided; and the key critical systems redundancies delivering the power, cooling, monitoring, and other facility management services. If the contract includes detailed technical descriptions, engage your engineering staff to review those contract documents.
Colocation contracts usually involve a master contract along with three to eight addenda, which may include the sales order, rules and regulations governing use of the premises, diagrams of the physical premises, and specifications for the supporting infrastructure like electrical distribution circuits. Complex contracts may include a delivery schedule indicating the work the colo provider will perform to prepare the cage or suite for the customer. One of the most important addenda is a service level agreement (SLA) to indicate the uptime metrics the colo provider agrees to deliver and quantify the compensation due to customers for failure to meet those metrics.
“We strive to state clearly in the contract the ways we can help customers benefit from new IT infrastructure solutions, incorporating flexibility into the overall services package,” said Mitch Fonseca, senior vice president and general manager of data center services for Cyxtera. “Colocation providers must also display an understanding for new innovations that are likely to disrupt or displace current offerings and deliver reliable solutions to store, transport, and secure data across a global footprint.”
Inform your corporate legal team several weeks before you expect to receive the contract, so an in-house attorney can schedule time to review the documents upon receipt. While most corporate attorneys are experienced in reviewing contract documents, few are knowledgeable in the particulars of colocation contracts. Users will typically benefit from engaging outside counsel with experience specific to colocation contracts to review the contracts as a supplement to your in-house counsel’s review.
“Colocation contracts are a unique hybrid of a physical premises lease and a services agreement where the customer requires sophisticated facility management and telecom services in addition to the right to occupy a fully constructed data center suite — both are necessary for successful colo center use.” said Jim Grice, partner at international law firm Bryan Cave Leighton Paisner. “As an experienced specialist in reviewing colocation contracts, I work cooperatively with corporate clients’ internal legal teams to ensure rights unique for data center use — but not widely understood by most general counsels — are fully captured in the contract. We’re an additional set of eyes to make sure the contract fairly protects the user.”
Don’t Overcommit (… and Overspend)
Because overcommitment to space and power is the single biggest source of overspending on colocation contracts, prudent colo users are advised to carefully project space and power requirements to avoid overcommitting unless there are compelling reasons to believe growth will occur during the contract period. Users should forecast the most likely power usage over the next 10 years, recognizing that forecasting power loads more than a few years in advance is imprecise, frequently due to planned migrations from legacy data centers into a combination of cloud and colocation.
Static and Dynamic Capacity
Users can integrate flexibility for future capacity in their contracts by initially committing within the lower half of the range of anticipated load if coupled with contractual rights to add space or power in future years. Many colo providers will offer various expansion rights if they are reasonable in quantities and pricing structure. Expansion options can include adding power and cooling to an existing suite, expanding physically into adjacent suites if available, and a ”right of first refusal” to expand into suites in future buildings planned on a large data center campus.
Resourceful users should seek multiple options for expansion and may even reserve adjacent suites in shell condition for future build-out by paying a modest reservation fee until critical systems are installed into the expansion space at the user’s option. The user should obtain the right to release the space reservation at a future date, which will terminate future fee payments.
As importantly, users should also seek contraction rights, which sometimes require modest fees to exercise but offer valuable options to reduce costs if your needs shrink dramatically due to a merger or an accelerated cloud deployment. Users should incorporate creativity into seeking bundles of expansion and contraction rights, and experienced colo procurement advisors can often assist in structuring these terms.
Users can also incorporate flexibility into their capacity planning by adding expansion rights not only in the initial data center but also into other existing (or future) data centers operated by the provider — such as international data centers — or locations with lower utility or telecom rates, reduced latency, or better suitability for business continuity. Flexibility can also be created through spend-shift to other services, like private cloud, that can add value to the overall deployment plan.
Itemizing the Costs
For each provider’s proposal received, get a detailed itemization of fixed and variable costs for space, power, interconnection circuits, services, and the proportionate reduction in those costs if you reduce your space and power quantities. A side-by-side comparison of these line item costs across competing providers often gives colo customers the information and leverage to demonstrate the provider’s outlying pricing structure when compared to the marketplace, frequently resulting in the provider reducing its proposed costs.
Negotiation “Wiggle Room”
On most proposals submitted in response to an RFP, the provider includes a 5% to 15% buffer that users can eliminate during the negotiation process, especially if the economic differences are supported by valid market data.
Users seeking to sign a contract before the end of a financial quarter (and especially at year-end in December) should ask for a further “signing discount” of a few percentage points if they sign the contract just before the colocation provider’s financial reporting period closes. This applies to both publicly traded and privately held data center operators, most of which are motivated to improve their sales numbers near the end of a reporting period.
Ask to Get
Conventional negotiating wisdom suggests that you get a better deal by asking for more. This is certainly true in colocation contracts, but negotiating the most aggressive economic package usually requires creativity and resourcefulness. Colo providers — and each property within their data center portfolio — have different supply/demand metrics affecting them, so some providers may be more willing to offer incentives and price reductions to capture a new contract than others. The following “tips and tactics” may improve overall negotiation success in most scenarios.
- Savvy users should seek special one-time incentives, such as a contract signing bonus. Some providers will provide a credit against all or part of the initial build-out costs for installing a new private suite and distribution circuits.
- Ask for a beneficial occupancy period without base rent payments during the first two to six months of the customer’s occupancy, during which the customer has access to a finished colo suite for installing distribution/telecom circuits and cabinets but has not yet commenced production computing in the space.
- Many providers can increase the quantity of power supplied to the initial data suite more economically than the initial power delivery, so users should seek reduced costs for additional power priced at a discount in $/kW to the initial contract quantity. This can be accomplished by pre-negotiating the expansion options, assuming the user can effectively cool the additional power within the original space.
- Many leading colocation providers have added internal staff to assist customers in audit and compliance tasks, supplementing an impressive list of existing certifications. New customers should request allocations of that staff time at no additional cost, or at a reduced cost, especially for compliance projects related to the customer’s initial migration into a new colocation facility.
- Many colo providers own dark fiber strands between their data center campus and the leading local carrier hotel and can provide use of a few of those strands for free or at reduced rates to win your new colo contract, helping you reduce overall networking costs.
- Wise users seek multiple renewal options at fixed rates, but the smartest among them go even further, seeking a “lower of fixed or new” renewal rate to take advantage of possible future market rate reductions spurred by industrialized scale of new development. In this scenario, the customer renews at the lower of a pre-negotiated rate or the most recent contract terms deemed acceptable by the colo provider for a similarly sized new contract, which may provide significant value.
Control “Gotcha” Costs
Many enterprises that have migrated compute functions to public cloud are now familiar with the risks of “gotcha” costs — those fees and surcharges that weren’t expected nor budgeted, which sometimes offset the savings promised by public cloud operators. Astute users should protect against surprise costs in colocation contracts, although such costs tend to be more predictable than in cloud agreements.
- One common add-on cost is the PUE uplift which is multiplied by the metered electricity amount to calculate the power reimbursement bill. If a data center is relatively new with a low overall load, it may have an actual PUE far higher than its design PUE, so seek a cap on the PUE multiplier. Prudent users can seek a “lower of cap or actual” PUE multiplier, especially helpful when facilities add additional phases that can decrease actual PUE in future years.
- Seek reductions in cross-connect fees, especially in mature data centers when the user requires more than 20 cross-connects. Colo providers have usually amortized their meet-me room construction costs once a data center has been operating for a few years, so those fees have high margins that can often be compressed when purchasing in quantity.
- Many enterprises are seeking public cloud adoption, using software defined networks like Megaport or PacketFabric, or cloud direct connect circuits to accelerate application and data set transfers. Users should limit any colo provider surcharges on cross-connect fees to utilize SDNs.
Colo contracts include SLA metrics and compensation to the customer if a provider misses performance thresholds. Both the trigger events (such as data suite temperature above ASHRAE standards) and the compensation for missing thresholds (such as credits against base rental costs) are negotiable. Users should seek self-help rights and contract termination rights — a draconian remedy in the event of repeated performance issues — to minimize the pain in the event of extended or chronic failures, which are, thankfully, very rare in modern colocation facilities.
Limiting Operational Impacts
Large colocation customers, typically those occupying a quarter or more of a data center building, should also seek modifications to the provider’s standard operating procedures, which could negatively affect processing operations. For example, some users might seek to prohibit preventative maintenance that could temporarily reduce online systemic redundancies during critical computing windows, such as the holiday season for a retailer.
Don’t Take the “Step Too Far”
Some corporate IT users want to win every single point in a contract negotiation, and this generally isn’t a sound strategy. A colocation contract is a long-term solution requiring cooperation, and most users are better served by negotiating a shrewd deal upfront, but one that leaves a reasonable profit on the table for the provider.
One case study illustrates this point. A corporate user wanted to absolutely clobber the colo provider in a new data center contract, and they achieved about 3% lower costs by taking a “scorched earth” negotiating strategy, as opposed to a more reasonable “let’s win but work together” plan. Soon after the new contract began, the customer realized they needed to ask a few favors in pending implementation processes, and the provider’s response was commensurate to that of the user during the negotiation process. In most cases, colo providers are cooperative and accommodating with customers to craft the best overall solution.
Advisor Role in Negotiating Contracts
Retaining experienced and competent advisors to supplement the user’s project team can be a critical element of the project’s success. Third-party site selection advisors who are experienced in colocation procurement can provide valuable insight and perspective during contract negotiations. Knowledgeable advisors use sophisticated financial models to negotiate lower costs while improving other contract terms, such as flexibility provisions that will provide significant value over the contract term. In addition to conserving the project team’s time, advisors document progress during negotiations to quantify savings achieved by the project team.