Businesses in India are going through both an exciting and a challenging time. There has been a significant growth in investments across most sectors. The size and scale of projects and operations have also increased. However, organisations are under pressure – from customers, regulators and governments – to improve service delivery as well as their operational and financial performance.

In their attempts to achieve higher levels of operational efficiency, the use of IT and IT-related technologies has become a key focus area for organisations. Thus, data centres have emerged as an important element of business and IT strategy.

A data centre is a centralised repository, either physical or virtual, for the storage, management and dissemination of data. It is a facility for housing computer systems and auxiliary components such as telecommunication and storage systems.

Data centres typically form the backbone of IT operations for any organisation or utility, especially those that have offices and projects located at different places, and thus require efficient IT systems to ensure connectivity to their headquarters for monitoring as well as decision-making. Most of the leading infrastructure organisations are setting up state-of-the-art data centres with high-end servers, storage area networks and multilevel firewalls. They are also steadily expanding and upgrading capacity.

Both private and public sector organisations are rapidly building their data centre capabilities. Currently, over 16 state governments have fully functional data centres.

As compared to the rest of the world, with the exception of China, the data centre market in India is growing rapidly. Data centre floor space capacity has been growing at 45-50 per cent per year in India as against 10-15 per cent per year in other countries.

Outsourcing gains traction

Setting up and managing data centres is a costly and complex exercise. In-house management of data centres is difficult for enterprises as it calls for technology expertise and is less cost effective. Though many large utilities and businesses have internal data centres, they are increasingly outsourcing these responsibilities to third parties.

The cost of setting up a data centre is between Rs 20,000 and Rs 25,000 per square foot. In comparison, by outsourcing these responsibilities, an enterprise can save over 30 per cent costs (capex and opex). Capex entails costs related to building power backup, cooling systems and the IT equipment based on the tenure of the project. Opex would be for managing the infrastructure, power consumption and rental, irrespective of the percentage of space utilised and for network redundancy. There are also indirect cost savings in terms of the time required to set up the space, and expansion and upgradation costs.

Given the growing opportunities in the data centre outsourcing market, many service providers have forayed into this business in the past two-three years and are expanding at a rapid pace.

The latest instance is the Tulip Data City (TDC) in Bengaluru, commissioned in February 2012. TDC is Asia’s largest data centre, with an area of 0.9 million square feet. The largest data centre in the world is the Lakeside Technology Centre in Chicago (1.1 million square feet), followed by the QTS Metro Data Centre in Atlanta (0.97 million square feet).

Tulip is investing Rs 9 billion in TDC over a three-year period. By mid-2012, it had already spent Rs 4.15 billion. IBM was the consultant for the project. A data centre is measured by its power efficiency. Tulip claims that TDC is around 30 per cent more efficient than the global average. The company has clients like Hewlett-Packard, IBM and NTT. Besides this, Tulip has built five other data centres across the country, and plans to upgrade these with the latest technology.

Another company focusing on its data centre business is Reliance Communications. It has four data centres at the Dhirubhai Ambani Knowledge City in Mumbai and has recently commissioned the fifth one. Besides, it has five more data centres across the country. The company has been hosting customers like HDFC Bank for over a decade.

Netmagic Solutions, now partly owned by NTT Com (74 per cent stake), is another emerging player in this market. Netmagic has seven data centres, including two in Mumbai. It is currently setting up a third facility in Mumbai to meet the growing demand.

The massive investment required to set up these data centres is justified for these players as they can host a number of clients. Today, the data centre business has grown to such an extent that some service providers have begun hiving off these operations into separate business units/ subsidiaries.

For instance, Tata Communications estimates that its data centre business would require investments of Rs 15 billion over five years and therefore it plans to hive off this business into a separate subsidiary. Meanwhile, Trimax-ITI is in the process of setting up its new data centre in Mumbai and is planning to expand its facility in Bengaluru as well.

As per an annual study by IDC, “Data Centre Opportunities in India, 2011”, the key verticals for opting for third-party data centre services include the manufacturing and IT/IT-enabled service segments. A growing need to focus on core business; lack of skilled human resources for in-house management of data centre operations; and rising power, cooling and real estate costs are the major drivers for the adoption of third-party data centre services. As per the study, the third-party data centre services market in India is likely to reach $671 million by end-2012, registering an annual growth of around 36.5 per cent.

So far, the majority of third-party data centre service revenues has come from co-location and hosting services. The managed services component in the total revenue market has been rising steadily. One of the key trends being witnessed in this space is what has been popularly termed as data centre-in-data centre. Major IT service providers like HP, IBM and Dell are setting up their own infrastructure within larger data centres. The service provider is, in turn, hosting this infrastructure for these companies and their clients. This works well for the service provider as it can focus on its core expertise (applications and services) without making upfront investments in power and cooling. For instance, Tulip is hosting a major IT vendor, which, in turn, is hosting a telecom company.

Virtualisation and cloud computing

As the adoption of cloud and virtualisation increases, there is likely to be a paradigm shift in the data centre presence in the Indian market. Cloud computing can be defined as providing services through internet-based technologies. Such solutions help enterprises cut costs substantially by replacing the capex model with an opex model. Cloud-based solutions are transforming data centres from traditional, virtualised, consolidated and centralised IT infrastructure into a service-oriented and economically efficient internal cloud. Upcoming data centres would enable internal customers to consume IT-as-a-service, host critical applications and data, and augment capacity by using an external cloud. This is important as organisations work to support a growing mobile workforce.

A study by Zinnov, a management consulting company, pegs the cloud market in India at around $400 million and predicts that it will rise to around $4.5 billion by 2050.

One of the biggest cloud computing projects likely to come up in future is by the Department of Information Technology, which is planning to set up a national cloud-based network that connects all state data centres, which would make this network the backbone of the national e-governance plan. The project, when complete, would deliver many government-to-citizen and government-to-business services via the internet. In effect, each of the 28 states and seven union territories will have a private cloud of its own. The department has invited proposals from IT companies like HP, IBM, Cisco and Dell to set up and maintain private clouds in each state. The exercise is likely to cost nearly Rs 1 billion.

Outlook

Going forward, the Indian data centre market is expected to witness significant growth with increased adoption of third-party data centre services, which are proving to be more economical for enterprises that do not intend to invest heavily in in-house data centres. As per McKinsey, third-party data centres are expected to develop at a compound annual growth rate (CAGR) of 32 per cent and reach Rs 55 billion by 2017. Among enterprise verticals, banking and financial services, media and entertainment, manufacturing, retail, and international telecom providers are likely to account for 70 per cent of this growth.

This, in turn, will have a positive impact on the data centre equipment market, which, according to a forecast by TechNavio, is expected to witness a CAGR of 10.4 per cent between 2011 and 2015.