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Calculating ROI for colocation

on May 19, 2020

When researching server hosting options for your business, you have likely found two key services:

  • Colocation – you supply and manage your server hardware which is installed in a datacentre. You pay for datacentre space, power and data, and usually incur high capital expenditure due to the upfront investment in hardware.
  • Baremetal servers – you lease hardware as well as datacentre space, power and data from a service provider. The hardware is managed for you and as it is leased to you, no upfront capital investment is required.

These services are very different, but in a bid to move towards digital transformation it can be difficult for SMEs to determine which approach is best suited for their business. Successful business leaders make decisions based on what will benefit their organisation over the medium and long term. It would not be wise to invest a significant amount of resources on something that does not yield a favourable return on investment, and the same applies to your business’ colocation strategy. 

But as the old saying goes, you can never improve on something that you are not measuring. In this article, we clarify the essential questions that decisionmakers should ask themselves when determining ROI (return on investment) for colocation, and whether a leased dedicated server is more appropriate.

Set a definite period for measurement

The first step is to define a specific period for measuring results such as a span of 3 or 5 years. Doing so will ground your ROI calculations with definite boundaries.  Common time periods include:

  • Life of hardware – if you are investing in server hosting through colocation, you will be investing in hardware. Consider your ROI in terms of the life of that hardware and the time period the capital expenditure is depreciated over.
  • Life of project – if you have a specific project (common for managed service providers, for example), calculate your ROI in terms of the life of the project and contract.

Your depreciation period needs to be reasonable and achievable – remember that server hardware is often outdated and no system will last ten years! 

Calculating Total Cost of Ownership (TCO)

The next step is to determine TCO based on the period you have determined above. 

When determining the TCO, you should think about the capital expense of devices, the forecasted life of that equipment, and the cost of capital. You should also account for the datacentre colocation costs (such as rack space, power and bandwidth). 

Likewise, keep in mind labour expenses for operating and preserving the software and hardware. You need to account for scenarios where your staff may need to attend a datacentre to repair hardware faults or conduct regular maintenance. These are all additional expenses of colocation compared to leasing dedicated servers or baremetal servers. 

When determining the TCO, it is a good idea to be as accurate and detailed as possible. Doing so will help you come up with an accurate figure that you can use as a benchmark for measuring ROI.

ROI = (Return – TCO) / TCO

The formula for computing is reasonably straightforward once you have the required elements all figured out. Just plug in the figures you have gathered in the order shown above.

For instance, let us say that your total cost of ownership is $200,000 and you get a return of $500,000. This means that your ROI over the set period is 150%.

At this point, you ought to now have a good idea on the return on investment that you would see with colocation. Now, compare it to a dedicated server which is often less than $200 per month with no upfront capital expenditure. Which is more suitable for your business? 

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