Data Center Contracts: Is It Time For Triage?

Ali Greenwood, Executive Director of Cushman & Wakefield’s Data Center Advisory Group

Data centers are the backbone that enables modern businesses to thrive. The contracts that govern these assets could make the difference between a business that is bolstered by its mission critical infrastructure and one that is restricted by it. A strong data center contract should promote smart, cost-effective, and flexible solutions that allow your business to thrive—even amid uncertain times.

Given the uncertainty in the today’s world, there has never been a better time to re-evaluate and re-negotiate existing data center contracts in order to realize savings, enable flexibility, and ensure protection for your business.

Market Dynamics Create Opportunity

As the colocation business model has grown and evolved, data center operators have become more efficient in all aspects: development, operations, management, etc. The modern data center user benefits directly from these efficiencies in the form of reduced operating costs and rental rates, increased uptime, and enhanced services.

Over the last five to seven years, data centers have experienced rental rate compression of approximately 3% to 7% year-over-year thanks to enhanced operating efficiencies, economies of scale, and an influx of capital into the data center sector.

Expiring rates from contracts executed five to 10 years ago are well-above market. Allowing contracts to auto-renew at standard 3% to 5% escalations means leaving money on the table. While existing data center tenants are not as likely to achieve ‘new-logo’ status pricing on renewals, there are several methods to renegotiate existing contracts in order to yield impactful savings:

1. Taking advantage of more modern pricing structures (i.e. $/ kW metered models s vs. pay per whip, pay per cabinetper cage SF, all-in bundled pricing, etc.…)
2. Blend-and-extend (renewing and extending early in exchange for more favorable terms)
3. Right-size the data center footprint for today and tomorrow’s needs

In a time when cost-saving initiatives are top-priority for C-level executives, re-negotiating data center contracts is an effective way to realize savings.

The Modern Data Center

Contract The data center colocation market looks vastly different today than it did just five years ago. The data center model has changed, and so should your data center contract.

Today, data center users, operators, and investors are dramatically more sophisticated. A healthy supply of inventory partnered with commoditized services and offerings is impacting the way users deploy and manage their data center footprints.

As the multi-tenant data center market has evolved and matured into a real estate asset class, many providers have restructured as Real Estate Investment Trusts (“REITs”). Current providers are more likely to negotiate leases on wholesale deals. Converting to a more tenant-favorable lease provides greater leverage, security, and protection for your business.

Change is Inevitable

When it comes to technology, change is constant and inevitable. Developments in software, hardware, and network have a direct impact on your business and critical IT functions. To ensure your business is well-equipped to deal with this change, flexibility is key. The Cloud has become an essential element of businesses IT strategy. Effective and efficient hybrid cloud strategies often take years to establish and implement. Therefore, data center contracts should allow your business to embrace this change by enabling flexibility through strategic provisions and business terms.

These could include “Rights of First Offer,” “Rights of First Refusal,” power expansion/reduction rights, early terminations for convenience, ramp schedules, revenue/geographic portability, and more.

Future-proofing data center contracts by securing flexibility provisions ultimately enables your business to drive your contracts, instead of your contracts driving your business.

Risk-Avoidance is Essential

Data protection, regulation, privacy and uptime are crucial to your data center contract. Negotiating strong Service Level Agreements(SLA) and credits can help mitigate risk and exposure to your business in a way that boilerplate and/or outdated SLAs would not. Most reputable providers promote 100% uptime – and many are willing to put those promises in writing.

Ensure your data center provider meets and upholds the certifications and compliance standards required for your business and protects your mission critical operations.

So, is it time for a Contract triage?

Whether you have a single data center footprint or a large portfolio, there are likely significant savings to uncover in your existing contracts. There has never been a better time to re-evaluate and re-negotiate your existing data center contracts with a data center broker and advisor. The data center has evolved; make sure your contracts do too.