Your Guide to a Strategic Data Center Colocation Plan

For many businesses, the choice between maintaining an in-house data center and outsourcing to a cloud service provider is a critical strategic decision. Here at VPSServer, we see firsthand how this choice can impact everything from your budget and security to your long-term scalability. While some companies may have the resources for managing in-house servers, others find that partnering with an established cloud provider offers a more flexible and cost-effective path to growth.

You might assume the choice is between maintaining servers in your own physical space, and hosting your cloud services through a third-party but there's another option: Using a colocation data center. With colocation, you own and manage your own physical servers and hardware. You rent space in a third-party data center that provides the physical environment, including power, cooling, and security. It's like renting a garage for your car—you own the car, but someone else provides the secure parking space and maintenance.

Cloud hosting, on the other hand, means you rent virtualized computing resources—like virtual machines, storage, and databases—from a provider. You don't own the underlying hardware. The provider owns and manages everything, and you access what you need on a pay-as-you-go basis.

This guide will walk you through the essential planning steps, helping you determine when to manage your own servers and when to leverage a partner's expertise.

What is data center colocation?

Colocation involves renting space, power, and cooling in a third-party facility, called a colocation data center, while maintaining ownership and control of your servers and networking equipment. This model proves particularly advantageous for mid-sized enterprises that have outgrown shared hosting but aren't ready for the massive capital investment of building their own data center space. Companies with strict regulatory compliance requirements, such as healthcare organizations or financial institutions, often find colocation ideal because it provides enterprise-grade physical security like a backup power system and environmental controls while allowing them to maintain direct oversight of their data and applications. Similarly, businesses with hybrid cloud strategies benefit from colocation's ability to provide secure, high-performance connections to multiple cloud providers while housing mission-critical systems that require consistent, predictable performance.

Defining the terms in colocation strategy

Building an effective colocation strategy requires three foundational steps: a thorough infrastructure audit, a clear alignment of business objectives, and a comprehensive workload analysis. Together, these elements ensure your approach meets both your current operational needs and your long-term goals.

Current infrastructure audit
For complete transparency, it is critical to conduct a comprehensive assessment of your existing IT infrastructure, including detailed analysis of computing hardware, networking equipment, data storage requirements, and power consumption patterns. The audit examines how equipment integrates with cloud-based resources, what physical security requirements your sensitive data demands, and how your current setup handles disaster recovery scenarios.

Business objectives alignment
Organizations should define and analyze their core business objectives to ensure their data center colocation strategy supports broader organizational goals beyond simple cost reduction. When properly aligned, colocation services can enhance market responsiveness, enable expansion into new geographic regions, strengthen disaster recovery capabilities, and facilitate seamless integration with cloud services and edge computing initiatives.

Workload analysis
Workload analysis examines the technical needs of your applications. This process assesses performance requirements, data processing patterns, and connectivity needs to determine which workloads are best suited for colocation, cloud platforms, or on-premises data centers. It considers critical factors like latency, data sovereignty for sensitive information, system integration, and scalability, often guiding the decision toward a hybrid cloud approach.

How does an effective colocation strategy impact your business?

Operational excellence and cost efficiency
Colocation providers routinely reinvest a large portion of their revenue—typically 15-20%—into infrastructure improvements, enhanced security, and regulatory compliance. This level of investment is often prohibitively expensive for a single organization to manage on its own. By outsourcing, you also eliminate the need to hire and train specialized staff to handle the physical data center, freeing up your team to focus on mission-critical business objectives.

Risk mitigation and business continuity
Professional colocation facilities deliver 99.995% uptime guarantees through multiple backup generators and redundant power grids that most organizations cannot cost-effectively implement independently. During Hurricane Sandy in 2012, major colocation providers maintained 100% uptime while 25% of Manhattan businesses experienced extended power outages. This resilience against natural disasters enabled financial services firms using strategic colocation to avoid an estimated $6.5 billion in trading losses during the disaster, demonstrating the critical value of robust infrastructure during emergency situations. Simply put, enhanced network security and professional monitoring services help organizations meet regulatory requirements more effectively.

Strategic business enablement
Strategic colocation enables organizations to expand into new markets without the need or risks associated with significant infrastructure investments, often reducing market entry timelines by 6-18 months compared to building dedicated facilities. Moreso, organizations with distributed colocation strategies achieve 23% faster application response times for global users compared to centralized deployment models.

Why is a colocation strategy essential now?

Scaling of data requirements
Data storage needs driven by big data analytics and compliance requirements have grown at compound annual rates of 23%. This massive expansion demands scalable solutions to accommodating unpredictable growth without over-provisioning expensive infrastructure. Compounding these data needs, edge computing deployments are expected to grow 38% annually through 2028. With edge computing growth, centralized data center strategies are increasingly proving inadequate for organizations serving distributed markets. As if data storage and edge computing expansion weren't enough to put previous scaling plans in doubt, Power density requirements for modern computing hardware have also increased significantly. with AI and machine learning workloads requiring 10-15 kW per rack compared to traditional applications requiring 2-5 kW per rack the energy debate is just begging to show its true feathers. As a result, many existing facilities cannot support these power and cooling requirements, making facility upgrades or relocation inevitable regardless of other strategic considerations.

Who is impacted by colocation?

IT operations and infrastructure teams experience the most direct impact, transitioning from facility management to strategic technology planning. With IT professionals spending 60-70% less time on infrastructure maintenance with a professional colocation setup, new possibilities can allow them to focus on higher-value activities like application development and security architecture. Finance and procurement departments benefit from transitioning capital expenditure models to operational expenses, thus improving cash flow predictability and reducing infrastructure investment risks. Compliance and risk management teams find professional colocation facilities provide enhanced regulatory compliance capabilities. Established colocation providers maintain an average of 12-15 compliance certifications compared to 2-3 for other data centers, while providing sophisticated audit trails and access controls that reduce compliance management overhead by 50-60% Fortune 500 companies have reported average annual savings of $2.3 million, after implementing comprehensive colocation strategies, while small to medium businesses typically save $300K-800K annually. The financial benefits come from reduced capital expenditures, lower ongoing maintenance costs, and improved operational efficiency that compound over time as colocation providers continuously invest in infrastructure improvements.

Recent trends in data center colocation

Performance monitoring and optimization
Today's colocation providers deliver real-time analytics and automated optimization services that offer detailed insights into power consumption, cooling efficiency, and network performance. These data-driven capabilities enable organizations to optimize performance while typically improving infrastructure efficiency and reducing operational costs.

Strategic reviews and adjustments
Organizations should conduct regular annual or semi-annual reviews of their entire colocation portfolio to evaluate provider performance, identify cost optimization opportunities, and assess evolving business requirements. This strategic approach to data center management reflects the rapid pace of technology evolution and ensures colocation deployments continue effectively supporting business objectives while adapting to changing operational needs.

Implementation and migration strategy

Successfully transitioning to data center colocation requires systematic planning, phased execution, and comprehensive risk management to minimize business disruption. According to Gartner, organizations that follow structured data center migration methodologies can reduce implementation risks. Understanding what this process entails helps ensure a smooth transition that maximizes the benefits of your colocation investment. Lets take a look at what the process would look like.

Step-by-step migration guide

Phase 1: Assessment and planning (weeks 1-4)
Begin your migration journey with a comprehensive infrastructure audit, documenting all hardware, software dependencies, and network configurations across your current environment. Conduct detailed workload analysis to identify applications ready for immediate migration versus those requiring modification or special handling. From this analysis, establish a migration timeline with clearly defined milestones and success criteria, then select low-impact pilot applications for initial testing and validation.

Phase 2: Provider selection and contract negotiation (weeks 5-8)
Evaluate potential colocation providers based on technical capabilities, SLA guarantees, and geographic presence that aligns with your business needs. Conduct thorough due diligence, including site visits and reference checks with existing customers, to validate provider claims about performance and reliability. During contract negotiations, secure flexible terms for future growth and clear termination procedures. Simultaneously, finalize connectivity requirements and design the network architecture that will support your operational needs.

Phase 3: Infrastructure setup and testing (weeks 9-12)
Deploy your initial rack space, power, and networking infrastructure at the selected facility, ensuring all components meet performance and security requirements. Establish secure connectivity between your existing infrastructure and the colocation environment using VPN or dedicated circuits with adequate bandwidth and redundancy. Configure monitoring, backup, and security systems that match or exceed current capabilities, then execute comprehensive testing of all systems, including failover and disaster recovery procedures, to confirm operational readiness.

Phase 4: Pilot migration and validation (weeks 13-16)
Execute the pilot application migration during scheduled maintenance windows to minimize business disruption. Continuously monitor performance metrics, comparing results against baseline measurements to identify any changes in system performance. Validate backup and recovery procedures to ensure data integrity and acceptable recovery objectives, while collecting feedback from end users and technical teams to identify issues requiring resolution before full-scale migration.

Phase 5: Full migration and optimization (weeks 17-24)
Execute the phased migration of remaining applications based on business criticality and technical complexity, with each wave building on lessons learned from previous phases. Implement continuous monitoring and optimization processes that leverage your provider's management tools and expertise to maintain peak performance. Complete comprehensive staff training on new operational procedures and escalation processes, then conduct a thorough post-migration review to measure success against original objectives and identify opportunities for further optimization and cost reduction.

How to improve your colocation strategy

An effective colocation strategy is not a one-time decision but a continuous process of refinement. Once you've chosen to outsource your infrastructure, a well-defined plan for management and optimization is crucial to maximizing the long-term benefits.

Conduct a comprehensive requirements analysis
This process involves more than just counting servers. Start by examining historical growth patterns and evaluating planned business initiatives to forecast your future needs, and be sure to include contingency capacity for unexpected demands. You must also consider the specific power and cooling requirements of modern equipment, which may differ significantly from the legacy systems being replaced.

Evaluate the total value (beyond the price)
When selecting a provider, look beyond the monthly fee and review the total value of the offering. This includes service quality, reliability, support responsiveness, and the provider's strategic capabilities that can enable your business to grow. Consider the less tangible benefits, such as improved staff productivity, reduced emergency response requirements, and the freedom for your team to focus on strategic, growth-oriented initiatives.

Perform thorough provider due diligence
A thorough due diligence process should include on-site visits, reference checks, a financial stability analysis, and detailed technical reviews to validate the provider's claims about their capabilities and reliability. Pay close attention to their experience with organizations similar to yours and their track record for managing complex migrations.

Negotiate flexible contract terms
Ensure your contract provides the flexibility to adjust capacity, modify equipment, and change services as your needs evolve. While maintaining reasonable cost predictability and service level guarantees, look for clear termination procedures, data retrieval guarantees, and expansion rights that will accommodate your changing requirements.

Conclusion

Implementing a comprehensive data center colocation strategy is a strategic business transformation that fundamentally improves how organizations deliver technology services, manage operational risks, and respond to evolving market demands. Businesses that approach colocation strategically consistently achieve significant improvements in operational efficiency and cost management.

The key to long-term success is to view colocation as a strategic partnership, not just a vendor relationship. By focusing on business outcomes and continuously optimizing your strategy as requirements change, colocation can pay significant dividends.