I direct the IT operations for a $100M construction firm.  We are
preparing to move our office, and rather than rebuilding a small data
center in a closet (literally) of our new office space, I have
selected a collocation provider to house my servers, SAN, backups,
etc. in a secure, temperature controlled, power managed environment. 
I want to build a solid business case to sell my CFO, CEO, and Board
of Directors on using a collocation facility.  My question is right
along these lines - why would I use a collocation facility instead of
putting a computer room in our office space?  I want to enumerate the
business and technical (with a strong emphasis on business) benefits
that I gain in a colo facility over self-hosting.

Dear billpoly,


For all but the very largest firms, colocation offers lower cost and
higher performance than the alternative. A company that lacks the
financial resources and physical infrastructure to build a dedicated
data center is better off sharing a data center with other companies
rather than using a substandard in-house solution. I can give you seven
solid reasons why this is so.


1. Robust power supply

A colocation center offers power redundancy on a scale that is
prohibitively expensive to replicate in-house. The best centers offer
full surge and lightning protection, double or triple battery backup,
and diesel power generation for extended outages. They bring to bear more
expertise and equipment than your construction firm alone could afford
on the task of keeping your servers running through thick and thin. The
alternative is to risk losing data and suffering ruinous downtime through
summer blackouts, winter ice storms, and other electrical calamities.


2. Physical security

You can apply all the password protection and put up all the software
firewalls you want, but what's going to stop an industrial spy or a
disgruntled employee from breaking into your server closet and walking out
with an armful of hard disks? The easiest and surest way for a malefactor
to steal your company's precious data is by reading it directly off the
disks. To prevent this from happening, you can either invest in your own
heavy-duty physical barriers, around-the-clock video surveillance with
tape backup, and armed guards, or you can use a colo center's facilities,
meaning that you share the cost of all these safeguards with other
safety-conscious firms.


3. Cheaper network bandwidth

A colocation center makes possible economies of scale that result in a
much lower cost per Mbps than your firm can afford on its own. For the
price of an in-house T1 line, a competitive colo center will sell you
bandwidth equivalent to a T3 line, which offers an order of magnitude
greater bandwidth. Or, for the price of leasing your own T3 line, you
can go optical at a colo center.


4. Bandwidth burst capability

It's no secret that 99.9% of the time, you are using only 10% of your
bandwidth. But as an in-house server operation, it doesn't make sense to
cut costs by reducing leased bandwidth to just that 10%, because what
happens the 0.1% of the time when bandwidth demand spikes to tenfold
its usual value? Then your business processes fail and customers are
turned away. So, in order to preserve your ability to deal with spikes,
you end up paying for ten times the capacity you need almost all of the
time. The solution is to lease bandwidth from a colo center, so that
most of the time you're only paying for that 10% you really need.

But because a colo center has huge data pipes, the spike capacity is there
when you need it. The center is able to reduce its excess bandwidth costs
because data spikes are distributed over time among the many different
users of the facility, thereby making long-term data usage much more
predictable than it would be for a single firm. The greater predictability
means a much closer fit between bandwidth usage and bandwidth capacity,
hence substantial savings. You save money because the colo center passes
some of these savings along to you.


5. Reduced network latency

A good colo center will have its network situated directly on an Internet
backbone. This means that data packets go through fewer routers as they
make their way between your firm and the rest of the Internet. Hence,
you and your customers emjoy lower data latency. What exactly does
that mean? Latency is the time it takes to begin a data transaction
rather than the rate at which data streams over the lines during a
transaction. If we take the analogy of a garden hose, latency is the
delay between turning the faucet and seeing water spurt from the hose,
whereas bandwidth is the rate at which the water flows.

No matter how much bandwidth you buy in-house, your latency remains
unchanged and may in fact dominate the total time of a transaction. In
other words, your clients may be spending most of their time waiting for
the water to begin flowing. This is especially true for applications that
involve corporate data transactions rather than streaming multimedia. To
make your servers more responsive to data requests, it makes sense to
avail yourself of a colo center's superior Internet connectivity.


6. Physical expandability

What happens when the in-house server closet becomes too small by half? Do
you add another server closet elsewhere in the building and run cable
between your two closets? Do you allocate a larger server closet, which
means shutting off the servers in the old closet and moving them over
to the new one, necessitating either a period of server downtime or a
laborious process of preparing for live service transition? A better
business solution is to rent space in a colo center. As with network
bandwidth, you are sharing the cost of excess capacity with many other
users, so the demand for more space averages out to a uniform level over
time. In pragmatic terms, this means that you can expand your server
capacity by a factor of two, five, or even ten without moving or shutting
down any one of your existing machines. This results in fewer service
interruptions and happier customers.


7. Environmental stability

A colocation center can protect your data and keep your hardware running
in the face of many threats that require specialized equipment and
infrastructure to combat. You share the cost of these measures with
other users of the center. For example, have you considered the damage
your data operations could sustain from an earthquake or a flood? A
good colo center is located on high ground in a geologically stable
part of the country. How about humidity, temperature, fire, and air
pollution control? Does your plant provide all these to data-critical
specifications? And if you want insure yourself against environmental
threats, would you rather share the cost of insurance with a hundred
other data-centre users, or shoulder the cost on your own? Once again,
colocation the way to go.


It has been a pleasure to address this question on your behalf.

Regards,

leapinglizard

My apologies for the delay in rating the answer.  The answer was
excellent and greatly appreciated.