Evolution is constant, so it should come as no surprise that digital transformation was and is inevitable. However, the pandemic accelerated digital evolution at a pace few could have imagined. Some experts believe the digital transformation we’ve seen in the last two years would only have been a reality a decade from now had it not become a necessity during the pandemic.
According to Gartner, Digital Transformation “can refer to anything from IT modernization (for example, cloud computing), to digital optimization, to the invention of new digital business models.”
During the pandemic, people’s everyday lives changed radically as most employees were forced to work from home, and students were put on distance learning. Telehealth consulting became the norm, and of course, online entertainment skyrocketed. And although online shopping was not new, new online customers had to adapt during the pandemic, and existing ones ordered even more.
Digital Transformation vs. Digital Culture
Digital transformation is to weather as digital culture is to climate. Aberrations in weather that become frequent result in a change in climate. Digital transformation is the current state, while digital-first or digital-only are fast becoming the norm, so we are moving to a new digital culture.
Video conferencing is a great example. This capability has been around for years, and its benefits have been overpromised and underdelivered. Previously, the biggest problem for video conferencing was getting people to try it, use it regularly, and feel comfortable with the technology, while interacting with colleagues and clients in this venue.
Today, video conferencing has become a part of digital culture and most people are fluent in most software, including Microsoft Teams, GoToMeeting, Google Meet, Webex, and the like. The inclement “weather” COVID created has led to some widespread changes in the digital culture, we see this in how business travel is projected to be slow to recover post COVID.
Increased Pressure on IT Organizations and IT Infrastructure
All the ongoing accelerated digital transformation has profoundly affected IT structures and the underlying real estate. Companies have had to move at breakneck speed to interact with their customers, employees, and members of their supply chains remotely. Think of Zoom’s challenge of going from 10 million customers to 200 million virtually overnight.
In many cases, companies’ IT infrastructures were not up to the task. Few had robust digital transformation plans, and fewer still had physical or digital infrastructure that could handle such radical transformation within a compressed time frame.
Many companies moved IT workloads to the public cloud (AWS, Google, Microsoft, etc.) to scale up quickly. Gartner saw an increase of 9.5% for worldwide IT spending in 2021 and is focusing increases of 4% and 5.5% in for 2022 and 2023 respectively. Public cloud computing has several advantages, like flexibility and availability of valuable metrics, but it also has a few challenges. Generally, storing, computing and accessing data in the cloud is less expensive than maintaining on-site infrastructure. However, revectoring IT applications for the cloud is not easy. Many companies found that they did not have the in-house expertise to affect the needed change, thus adding consulting costs. The costs of cloud computing can increase exponentially if not managed properly. Many companies are finding that cloud and cost management are capabilities they need to develop internally or acquire.
Many companies have also utilized data center colocation facilities as a component of their digital transformation. Creating private or hybrid cloud solutions in colocation facilities implies reduced cost because companies don’t need to build their own data center. Notwithstanding, the colocation fee are somewhat intricate and can vary from facility to facility as the fees are usually based on floor space with extra charges for bandwidth, electricity, and physical security, among other costs.
The rate of growth in the data center industry has added a new challenge for the industry, competition from industrial uses (driven by low vacancy rates in the industrial real estate sector, 3.1% across the US according to Cushman & Wakefield’s Q2 2022 Marketbeat) and supply chain challenges have had a suppressing effect on new data center supply. This has created an environment where data center operators and users are having to plan much further ahead to ensure infrastructure can be secured to meet their needs. On the user side there has been record levels of preleasing for new data center space, and we see operators looking to purchase hundreds of acres of land in an increasingly competitive environment with the ability to develop massive data center campuses to service these users.
The Right Approach
Whether you are in the early part of your digital transformation or well down the road, the real estate components of the strategy are essential to consider. For many companies, their real estate has been historically handled by facilities people and IT infrastructure by technology experts. However, the real estate housing the IT equipment can be a “jump ball” where one or both groups claim domain over it. There needs to be communication and collaboration between these groups to achieve the organizations goals. In most large data center markets, there is limited supply in the short term and lines have been forming for new supply coming to market.
To help guide the real estate portion of the strategy, a knowledgeable real estate data center broker can be of great assistance. They have deep domain expertise in real estate and IT infrastructure and can consolidate the different priorities to help companies make the most practical data center solutions and ensure that the real estate is an integral part of the digital transformation.
Moving IT out of traditional office
Historically, servers and other IT infrastructure have been stored in traditional office spaces. As a company moves along on its digital transformation, sometimes this equipment is no longer necessary. In other cases, the equipment or the applications should be transferred to the public cloud, colocation facilities, or a company’s data center.
Selling legacy data centers
As more and more of a company’s IT is moved to the public cloud or colocation facilities, legacy data centers have become surplus to a company’s needs. These facilities have become in demand by colocation companies needing additional facilities. In many cases a deal can be structured such that the company can vacate the legacy data center in phases as they move IT workloads to the cloud.
Managing colocation renewals
If renting space in colocation facilities becomes an integral part of a company’s IT strategy, it also becomes part of its real estate strategy. These facilities are expensive to set up and equally costly to relocate.
Accordingly, the strategy associated with managing renewals must involve significant lead time to allow for a potential relocation as negotiating leverage. Also, a knowledgeable data center real estate broker can assist with comparable rates and terms and conditions in the local market.
The optimal mix of public cloud, colocation, and on-premises solutions
Increasingly, companies are deploying a hybrid solution to support their digital transformation moving to their digital culture. This will typically employ a combination of public cloud, colocation, and on-premises facilities. The optimal combination of these components is fluid and will shift over time. Understanding these shifts and anticipating their effect on the underlying facilities will allow corporations to proceed on their digital journey with the least friction and at the lowest cost.
Digital Culture as the New Normal
The shift from digital transformation to digital culture has brought enormous challenges for a company’s IT organizations. The follow-on effects for the real estate that houses IT are significant and costly. A well-conceived plan to optimize both will not only facilitate a company’s evolution but will also ensure that the journey is undertaken with the least number of roadblocks and at the lowest cost.
A data center real estate expert can assist by bridging the gap between corporate IT and Facilities professionals. After all, what’s the point of digital transformation if companies and employees cannot fully take advantage of it?
Cushman & Wakefield’s Global Data Center Advisory Group has worked with Hyperscalers, Cloud Service Providers and Enterprise Customers to assist them with all of their data center needs. Whether this is acquiring new data center sites and facilities and/or to dispose of surplus facilities, our team brings together global best practices with local market knowledge.