It's twilight for small in-house data centers

More workloads are shifting to service providers, with concern about skills playing a key role

Virtualization, cloud services and software-as-a-service (SaaS) is making it much easier to shift IT infrastructure operations to service providers, and that is exactly what many users are doing.

This trend is being felt the most at in-house data centers in small- to mid-size companies. These firms may be trying to shut down their data centers, or shift a major portion of their workloads to external providers.

Larger firms have been consolidating data centers for years, and even the federal government is shutting down hundreds of data centers in its consolidation push. But these big firms and institutions are optimizing their operations and holding on to them, even as they increase their use of SaaS and cloud services at the margins.

The trend at smaller data centers is a significant career issue. The best jobs may be at service providers with the potential for a career path, instead of at an in-house, small- to mid-size data center.

Hagen Wenzek, the CTO for IPG Mediabrands, is among those making the shift to service providers. He recently moved management of SQL servers and Sharepoint to Avanade, a manage services provider founded by Accenture and Microsoft.

"I can't hire enough experts willing to work for a media company," said Wenzek. IT infrastructure professionals would rather work for a technology company, he said.

Mediabrands' outsourcer improved the performance of technology and dramatically sped up report delivery, said Wenzek. He has shifted his staffing efforts to business analysts, who can work with the data and visualization tools. The analysts can see a career path at IPG, he said.

Wenzek's says his outsourcer is planning to move his servers out of the IPG data center to a third-party cloud environment. That's fine with him. It's up to the outsourcer to determine the best environment for delivering services and lowering costs, he said.

Service providers are growing dramatically. Of the new data center space being built in the U.S., service providers accounted for about 13% of it, but by 2017 they will be responsible for more than 30% of this new space, said Rick Villars, an analyst at IDC.

"Most of the rapid growth is in service providers," which includes hosting, co-location and things such as a Facebook buildout, said Villars.

The service provider growth can be seen in companies like Rackspace, which plans to hire 1,000 new employees over the next two years. It told investors in its 2012 annual report, released this month, that demand is growing, in part, because most smaller companies do not have the IT staff to manage their operations and do not want to spend capital on new equipment.

"We are definitely seeing a trend away from in-house data centers toward external data centers, external provisioning," said Gartner analyst Jon Hardcastle.

Concern about skills was one of the reasons why Gene Berry, the CIO of insurer OneAmerica Companies, decided to transfer his data center operations to a third-party service provider.

OneAmerica's data center took up 25,000 square feet, one full-floor of its Indianapolis-based tower. By June, the firm expects to complete transfer all its services to T Systems North America. It's in-house data center will be reduced to 2,000 square-feet, mostly for networking, and will be managed by the service provider.

One of the reasons for this decision was staffing, said Berry. The company had about 65 employees in its data center and about 18 different technologies, and in some cases there was only one or two people who had the knowledge to run certain specialized technologies. "That gave us a lot of concern long-term; we didn't have the ability to hire backups for these technical platforms," he said.

Hank Seader, managing principal of the Uptime Institute, said that it takes a "certain set of legacy skills, a certain commitment to the less than glorious career fields to make data centers work, and it's hard to find people to do it."

T Systems has created a private cloud-like, variable-capacity model. If Berry uses less storage or consolidates servers, then costs go down. They plan to modernize their applications.

Most of OneAmerica's data center employees have left the company, and Berry says he has since put put much more focus on application development and working with the business.

Do in-house data centers have a future? "I think only for the really large companies that have scale; for smaller providers, for smaller companies, no," said Berry.

All firms are trying to limit the IT deployed in small data centers, said IDC's Villars. Smaller firms may be shifting more work to service providers, while larger firms are consolidating and building bigger data centers as they centralize assets, he said.

In many cases, virtualization has substantially reduced the need for in-house data centers for smaller IT operations, "and they don't seem to have any plans to expand them at all." They are either moving future work to co-location facilities or to service providers.

Vince Kellen, the senior vice provost and CIO at the University of Kentucky, also wants to shrink his data centers, which total about 15,000 square feet.

Kellen said they went through an exercise to determine what it would cost to transfer most of their services to Amazon Web Services, and he said the cost was obscenely high. The ROI didn't work, even factoring in the cost of paying for a new campus data center, he said. One building they are using for a data center dates from 1929.

But the cost of cloud environments is not discouraging to Keelen. He believes that just about every service can be run via the cloud environment, but the pricing has yet to mature and needs to drop. It's different for SaaS services, where software licensing costs and hardware are combined in a way that can be advantageous, he said.

For now, Kellen sees a gradual migration to SaaS providers, via platforms such as ServiceNow o though VMware clusters.

In about three to five years service provider pricing models "will be very attractive to us and allow us to take most of our computing off of our data center," Kellen predicts. He'd like to reduce his data center footprint, by half to two thirds.

Broader trends aside, there are many data centers that will maintain operations and employees.

Michael Kohlman, the IT managers of Cook Group Inc., a life sciences firm, uses SaaS for some applications, which accounts for about 20% of his infrastructure. But they will keep their core operations in-house. Protecting intellectual property, particularly in a highly regulated industry, "is strongly desired," he said.

But Kohlman was quick to adapt to data center technology trends. He jumped on blade servers in the mid-2000s and was a Dell beta tester, and built 1,500 square-foot data center with high density systems in mind. He has compared the cost of his operation with service providers, and sees little difference.

Kohlman has also built a staff with the skills he needs to run his environment, with each IT worker having an average 10 years of experience. "To try to run a modern, highly virtualized data center requires deep skill sets," he said. Being part of a larger firm, at just about $2 billion, and with just over 10,000 employees, helps to maintain staff.

Broadly, Kohlman sees a mixed outcome for the future of in-house data centers, and points to the decision by some firms, notably General Motors, to in-source their IT. While he can see the trend by IT shops, especially at smaller firms, to service providers, some of it is being generated by the excitement of the times. "IT does get fascinated with bright shiny objects," he said.

Survey data reports shows rapid and strong interest in cloud services, something Jerry Luftman, executive director of the Global Institute for IT Management, has seen in the Society of Information Management survey data surveys.

Outsourcing is growing generally, said Luftman. "The bigger question will be is it outsourced domestically or is it outsourced offshore," he said.

Peter Foulkes, an industry analyst with 451 Research, said many things will hold data centers back from service providers, namely security and regulation. He sees data centers sizing themselves for average workload environments and using cloud providers to meet peak demand. "Most organization realize it's more cost effective to run it themselves, as long as they are a large enough company," he said.

Patrick Thibodeau covers cloud computing and enterprise applications, outsourcing, government IT policies, data centers and IT workforce issues for Computerworld. Follow Patrick on Twitter at @DCgov or subscribe to Patrick's RSS feed. His e-mail address is

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Copyright © 2013 IDG Communications, Inc.

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