Build a Data Center or Contract Hosting?

bbsguru asks: "Our Government agency has around 100 independent divisions that share a dozen national applications and a private WAN. We are working to consolidate some of these applications (e-mail, SQL databases, specialized web services), and are facing a familiar choice. One option is to contract out data hosting, e-mail server hosting, and so forth to various vendors (with negotiated SLA's and all the best guarantees, of course). We have already started doing this for our private WAN-to-World gateways, VPN management, and one major SQL application, each with a different vendor, so far. Others are advocating the creation of a national agency-owned facility, where employees would perform these functions instead of contractors. Network management, IDS, data replication and so forth, for all the consolidated applications under one umbrella. Is a series of contractors really the way to go, or are there real benefits to keeping it in house?" The costs are always a factor, but the one-way nature of the contractor choice is also weighing in this decision. Some are concerned that if the expertise to create and manage these highly custom databases and services is farmed out to contractors, there will be no other choice in the future. Trouble is, as we evaluate our options, the process of contracting out bits of the whole is already underway. With each new contract, one more service to be brought into a datacenter is lost, making the whole thing less practical. Are we swimming upstream here?"

Comments

Bring it in house

[Salvance]

When you're talking about that many divisions, I'd say bring it in house. It may cost a little more, but the level of control you need cannot easily be quantified with a simple price tag.

I used to work for a 100,000+ employee consulting company, and I saw SLAs and contracts broken time and time again ... or saw situations where companies had to spend millions (or even billions) to get out of contracts and unwind decisions that didn't make sense in the longterm. It was a nightmare to manage a few outsourcing contractors, I couldn't imagine trying to manage dozens or more.

And since you're working for a government agency, you probably won't even be able to achieve any significant cost savings by outsourcing (since most contractors save money by offshoring resources, which I believe is still a no-no for government work).

We're doing both

[plover]

Our company has gone both ways. We contract with a vendor to host our mainframes, but we've also built our own secure data center to house the many PC and Unix servers.

Contracting is attractive because the lawyers have this idea that you can sue the hosting service for failing to deliver services as promised. Of course if they fail to deliver, you have roughly three days before your company is permanently crippled, and seven before you are out of business, so that ultimately means only the vultures and the lawyers will get paid; but it sounds like a good idea to management. As a government agency you'll get yelled at and fired, and a few members of Congress won't get re-elected, but you won't go out of business.

One advantage to hosting is that they keep us current with hardware. Our contract stipulates an upgrade schedule for both hardware and operating systems, so we're constantly shuffling in the latest and greatest technology.

I don't know what the price difference is, as I don't ever see those kinds of numbers. But a new data center is mind-bogglingly expensive after you factor in generators, fuel tanks, chillers, security, alarms, power, fork-lifts, flooring, racks, cubes, offices, operators, guards, etc. With a hosting service you're sharing some of that overhead with the other customers of the host.

Running your own data center is good if you have a good team that knows what they're doing, and enough depth to survive the inevitable turnover. We do. But knowing how to successfully run a data center is different than knowing how to build one from scratch -- you need both kinds of knowledge before embarking down this path.

The choice isn't about hosted or not

[QuantumRiff]

It is about Talent. Do you have (or can get) the people that are able to perform the duties well? Can you pay them competitively? and keep them? The cost of a data center is negligible vs. the cost of downtime due to mistakes, turnover, and bureaucracy. The hosted idea is great to get rid of mundane tasks that are not part of your "core competencies", or where you simply can't get or maintain enough work for a qualified person.

You mention contracts with Service level agreements. If you want to do this "in house" you will need to create these same contracts with the business units that you need. This will give the higher ups the same finger pointing trail that they would have with a hosted solution, as well as the same assurances of reliability. Quite honestly, you would basically have to treat this new "group" as a separate company within the company. I have yet to see a case when it is cheaper over the long run to have a hosted solution, but hosted is much faster to setup and get working. Not to mention, it is awfully hard to re-negotiate, or terminate a contract when a company is holding all of your crown jewels.

I manage a financial data center

[Travoltus]

My boss's business was swirling around in the same toilet bowl that you are.

We found that for accountability reasons and, in related issues, reliability and reputation issues, we had to bite the bullet, build the data center, expire (domestically) outsourced (er, contractor) contracts, and take it all in-house.

If you're not a financial services company it might be a less dire necessity. If you're a public company of any type? Between you and me, I'd take the data center. For many reasons requiring about a megabyte sized post, SOX will inevitably bite you on the butt when your data is "elsewhere" - elsewhere being anywhere except right there in the data center where you can control its usage in a highly draconian matter. There was also a recent law that came into effect regarding keeping all internal emails.

Contractors don't necessarily screw up, but there's an old war term my pappy taught me that applies here... don't let your supply lines get too numerous or too thin. Too many pipes tend to spring one leak, and nowadays one leak is very bad news. Keep it all in-house and you're statistically guaranteed to have less drama.

Oh and before someone says it, yes, have two data centers. In case the first one becomes the real life setting for "Destroy All Humans" or something.

Perfect Market vs. Real World

[dbarclay10]

Something you should consider is "perfect market" vs. "real world".

In a perfect market, outsourcing is the main way of taking advantage of economies of scale. You don't run your own national telecommunications network, you outsource it to the national network. You end up paying (cost - economies of scale + profit). The trick is, if you can reach those economies of scale with your datacenter, and you're a competent bunch, you end up paying (cost - economies of scale). So you can save money. There are obvious security and accountability advantages too.

That's the perfect market. In the real world, these folk charge far more than (cost - economies of scale + profit). They cater to inept organisations who couldn't collaboratively tie their shoes up without a contractor to show them how to do it. So you end up paying (cost_of_incompetents_doing_the_job - economies of scale + profit). The profit part of the equation is miniscule compared to the differences between "cost" and "cost of incompetents doing the job". If the home-grown data center would be big enough (I don't know that it would be, given the brief description in the post), and if it was competently-run, then you can save huge amounts of money by doing it in-house (again, aside from all other benefits).

This post has dealt exclusively with cost. Personally I would consider the other factors (security, accountability) to be the deciding factors, assuming that both options implemented services competently.