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Buyer beware: 10 things to look out for when buying colocation services in a multi-occupied data centre

  • United Kingdom
  • Technology, Media and Telecoms - General

14-11-2017

The acquisition of rack space and services from a colocation services provider – whether a large wholesale transaction or a modest retail colocation deal – should be a relatively straightforward exercise. And yet there can be a huge disparity between what one colocation provider might unblinkingly tell you are normal “market” terms and those offered by another.

This breadth of variety in what should be largely uncontroversial terms and conditions is not just a feature of the wholesale colocation market, but also the more commoditised retail colocation sector. After all, if you were buying serviced office space from two different providers you would not expect there to be a material difference between the T&Cs on which the space is offered. When purchasing colocation services, ideally the differences should be largely confined to the specification of the services and the associated price per rack or per kilowatt.

On larger transactions, or ones relating to colocation space where you are planning to install servers or other equipment running critical applications for your business, do some due diligence – not only in relation to the services being offered by the colocation services provider but also in relation to the data centre itself and the contracts, and property interest, that underpin its service offering.

So beware! Not only are not all data centres alike, but neither too are the terms on which the colocation providers may be offering to contract with you. Here is a list of the top 10 issues that you should look out for.

1. Service provider’s interest in the data centre – Does the operator own the data centre directly or is it simply providing services to the property which is owned by a member of the same group? Is it held freehold or leasehold? Direct freehold property ownership generally provides the greatest flexibility for an operator to do as it wishes, including building out further colocation areas and carrying out customer fit outs. If the property is indirectly owned or held under lease, third parties may need to join the transaction or consent to its terms which will affect the timing and add complexity to your deal.

2. Power availability – If you are contracting with the service provider for a large amount of power capacity, does the provider have the ability to deliver the promised level of kilowatts (or megawatts), particularly in relation to any options that may be being granted for additional capacity in the future. The relevant electricity connection and supply agreements should be reviewed to verify this. Often an operator may have an offer letter from the relevant distribution network operator rather than actual contractual arrangements and converting that offer into a contract and then carrying out the requisite works to build the infrastructure needed to deliver the additional power capacity could take many months.

3. Adequacy of service credits – The service credits payable under a colocation services agreement exist primarily to focus the operator’s team to ensure that the services are met. They are there to encourage good practice, and conversely, discourage bad practice. If they do not sting when something goes wrong, they are not doing their job, and moreover, will not provide adequate compensation to you for losses. The level of credits payable for service level failures can range from the derisory to the exorbitant, and what works best for the parties requires balancing of risk and their relative negotiating positions (and whether those credits are your sole and exclusive remedy for the service outage). Separately, consideration should be given to any general caps on liability which seek to reduce the amounts paid in service credits and limit other payments generally. Any caps need to be set at a meaningful level to allow recovery of losses over a period of time, without bankrupting the operator.

4. The right to walk away after persistent critical outages – If any of the core services - power, temperature and humidity - fail this could create problems and losses that go beyond the levels of compensation payable under the service credit regime or the general liability provisions. If these issues occur repeatedly, this calls into question the sufficiency of the infrastructure to cope with demand or perhaps the operator’s technical ability and efficiency. Self-help remedies are unlikely to be feasible in a multi-customer data centre, so being able to terminate the contract and walk away may, despite the attendant risk and migration cost, be the only sensible outcome to mitigate further losses and impacts on your business or that of your customers.

5. Scale up, or down, power capacity and density – It can be very useful to scale up the power density of your colocation racks and you overall power capacity as your business grows. This will almost certainly be easier (and cheaper) than finding a new data centre and avoids the risk to your business of migrating from one data centre to another. It is perhaps no surprise that even customers of poorly performing data centres are reluctant to move – customer “stickiness” – given those costs and risks. Consideration should be given at the outset as to whether there is sufficient space and power at the data centre to enable you to scale up, and whether any reservation or option fees will be payable for this. Conversely, being able to scale down your operation can also facilitate your exit strategy over a longer period, perhaps where you are migrating parts of your IT operations onto a managed or cloud platform with a different provider.

6. Options to renew/extend – Linked to the above, being able to renew your contract at the end of the term can avoid an expensive migration. Typically a contractual option to renew will be on the same terms and for the same price, escalated in accordance with a rate that the parties agree. If you do not have contractual rights to renew, you run the risk of being held to ransom on the pricing of your new contract, with little or no time available for an orderly migration out of the data centre.

7. Remote hands and cross connects - Most data centre operators will offer a remote hands or smart hands service and provide cross connect services. What can vastly differ from one data centre to another is the cost of these services. Once you have signed your initial colocation services contract you are, after all, a captive market – from the operator’s perspective – for these additional services. You should ensure that the operator has a tariff of prices for basic remote hands and cross connects services wherever possible, with controls on the frequency and level of price increases to enable you to budget future costs, and with adequate service levels and response times.

8. Power recharges – If the price that you are paying for the colocation services is not inclusive of power consumption, watch out for mark-ups being applied to the unit cost of electricity being recharged to you. Unless the colocation service provider states otherwise in the agreed term sheet, you should expect to for the electricity consumed by your equipment on a pass-through basis. If an administration charge is payable on top, then this should be stated, rather than priced into the kilowatt hour rate charged by the operator. Ensure that you include in your contract the right to require the operator to hand over evidence of the unit rate being charged by the electricity supplier, and oblige it to negotiate the best possible deal (within reason) once its supply agreement comes up for renewal – and if you are particularly concerned about the risk of the operator doing a soft deal, use benchmarking as a means of holding the operator to account.

9. Power usage effectiveness (PUE) – The environmental efficiency of the data centre in which you have chosen to buy colocation services is likely to be one of the reasons that you chose a particular service provider. After all, even over the term of a relatively short colocation services agreement, the power consumption charges are likely to eclipse all other costs associated with occupation that data centre. PUE is the metric used to measure the environmental efficiency of the operation of data centres, and so if this a driver to your buying decision, ensure that the operator is committed to maintain the PUE of the data centre at that level or better – or at least cap your liability for contributions towards the cost of power consumed by the data centre’s infrastructure at a level that reflects the design PUE.

10. Security – Data centres should be secure facilities, containing physical security measures such as security staffing at adequate levels, 24 hour CCTV operations, intruder alarms and access controls. Thorough due diligence should be undertaken to confirm what security is in place and consideration should be given to a security service level and credit regime to promote an ongoing commitment to the agreed security standards. Invariably CCTVs and mag locks fail from time to time, but having the operator post a guard outside the suite whilst these are being repaired can prove an invaluable protection against unlawful access to your servers and the risk of data theft.

Conclusion

Familiarity with key legal issues that arise in relation to colocation services agreements such as those described here can you help inform the commercial terms that you negotiate with prospective providers before you get into the nitty gritty of the legal negotiations. Doing this will save you time and effort during the contract negotiation and avoid pitfalls - and headaches - that might otherwise be encountered during the lifetime of the contract.

For more information contact

Mark Chester, Partner
Francis Turley, Principal Associate

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