Outsourcing Real Estate and Risk

Posted by Ashley Patterson On 29th July 2014 In Corporate Property Strategy

The traditional corporate office lease is ill suited to many companies today, especially those in cyclical industries. If an organisation can’t reasonably predict under a business plan their requirement for traditional leased real estate then this should be reflected in their appetite for long leases. Easier said than done? Well, a significant part of our real estate can be outsourced. This is best done as part of a real estate project such as an office relocation, resizing or restructure. Here we look at one traditional aspect of an office that can be readily outsourced saving on rent, operating expenditure and substantial future capital cost.

While most mid to large sized businesses have outsourced much of their IT infrastructure today; email, back up and file servers, many, for historical reasons, still have a part of their corporate real estate devoted to housing and servicing computer racks. The racks themselves may not occupy a lot of space, maybe only four square meters allowing for circulation, but the space and resources required to service these racks effectively is where much of the cost goes dramatically north.

To host ones own critical infrastructure requires a controlled and secure environment. This includes space and capital for;

• Climate control equipment both internal to the computer room and external to the tenancy. Typically this will include some redundancy such that when one unit fails there is a back up to take over, further increasing the foot print and cost.
• Fire detection and suppression.
• An Uninterruptible Power Supply (UPS) and either dual power supplies to the room or back up power such as a generator. Again these require both internal and external plant.
• Security – including both equipment and space.
• Service technicians or a full blown IT department.

The cost of building such a secure and controlled environment can be between $5,000 and $10,000 per square meter plus the overhead associated with the service team and large power requirement.

Given this, most companies, when provided with the opportunity, will seek to outsource this to a highly protected data center and connect to their equipment via a high-speed data link, typically fibre. The cost of fibre in most urban areas has fallen dramatically in recent years.

Modern data centers are graded according to a Tier rating. Tier 1 allows for a maximum down time of a few hours per year. Tier 4 provides for a maximum downtime, or unavailability of service, of only 27 minutes in a year. This requires multiple levels of redundancy in all aspects of the performance of the data center. The cost of building such facilities is huge. Users typically engage with such facilities under what’s known as a Service Level Agreement or SLA. This contract specifies what is done for the client and what they must look after themselves. It will also specify the maximum down time of your service when hosted by the data center operator.

Users of these services not only benefit from far lower capital costs but have, in effect, outsourced the risk and real estate associated with hosting their own.

Clients of such service providers can also benefit from having their equipment fully serviced and upgraded when required, all without the worry of doing it themselves. The operation of their IT infrastructure becomes an operating expense alongside wages and rent, quantifiable and scalable.

Of course, some minimal infrastructure must continue to be housed internally, but this is limited to switching, communications and structured data cabling. These items are far less demanding of power, space, supervision and environmental controls.

As with all good ideas this approach is not without issue. The biggest obstacle many businesses will face when considering such an outsourcing project will be the incumbent IT department. Such an initiative can be deemed a major threat to job security and will often, as a result, fall over at this hurdle. A motivated IT department can strike the fear of god into an unwary CEO and convince them of the risk of undertaking this kind of move.

Given the constant evolution of technology and risk associated with cybercrime there are few organizations who can afford to keep their critical IT infrastructure in house. From an operational perspective it is both expensive and inflexible, two characteristics of corporate real estate that wont survive this generation.

Ashley Patterson
Patterson Property Consulting

© Ashley Patterson 2014