This article first appeared in Digital Edge, The Edge Malaysia Weekly on September 9, 2024 - September 15, 2024

Colocation data centres are rapidly gaining popularity, owing largely to the growing need for secure, scalable and cost-effective IT infrastructure. These may also prove to be a boon for small and medium enterprises (SMEs) that want their IT needs reliably and efficiently met. In a nutshell, a colocation data centre rents space to SMEs or other enterprises to house their servers and IT equipment.

“Colocation data centres provide significant scalability and security benefits for SMEs. Scalability is achieved through the physical space and advanced infrastructure offered by these centres, allowing businesses to expand their hardware without constructing new facilities. Colocation centres also provide flexible bandwidth options and the ability to scale IT infrastructure as needed, which is often more cost-effective than maintaining a private data centre,” says Chan Kee Siak, founder and CEO of Exabytes Group, which offers colocation services.

It offers physical and network security measures such as 24/7 monitoring, biometric access controls and advanced firewalls. Colocation facilities provide redundancy and disaster recovery options, ensuring uninterrupted operations and protecting against data loss, says Chan.

For SMEs with strict regulatory requirements, colocation centres offer compliant infrastructure, helping them meet legal standards without significant customisation costs, he adds.

It also helps minimise capital expenditure for SMES, says Wayne Ch’ng, director of technology for data analytics and business intelligence platform SYCARDA.AI.

“Colocation will provide the physical facility, numerous server racks and advanced cooling, telecommunication and power needs for a data centre. These will be shared costs between all colocation clients reducing the initial investment required. It will also allow for scalability without having an additional capital outlay.”

Despite the advantages that colocation data centres offer, Ch’ng has observed that many SMES — retail ones in particular — have been hesitant to adopt the services.

The biggest challenges are cost and trust, he says. “SMEs IT budgets are much smaller than enterprise, in percentage or actual ringgit value. Renting space at a colocation does not make sense to them when they can reuse existing facilities, regardless of effectiveness or compliance. Security, in the form of trust, is also a concern because they don’t have a reason to trust that their equipment — physical assets — is safer at a location outside their premises.”

Chan says: “SMEs may also be uncomfortable with relinquishing physical control over their critical infrastructure to a third party. Relying on external providers for the security and availability of data and applications can be a significant concern. Despite the high levels of security typically offered by colocation centres, SMEs might still worry about the safety of their data when it is stored off-site. They may also question whether colocation facilities can meet specific industry compliance requirements.”

Concerns about contracts and service level agreements (SLAs) can be a barrier too, says Chan, as the terms of these agreements are complex and rigid. Understanding and negotiating them often requires legal and technical expertise, which some SMEs might lack, he says.

“Other common hesitations are tech obsolescence and the cost of purchasing new equipment. To refresh a tech stack to install off-site doesn’t make sense to them when they can provision in the cloud. Even with the capex savings, there is still spending required for servers, licensing costs, storage and more.”

Technical expertise also poses a challenge. “Managing servers in a colocation facility requires a certain level of IT know-how, which might not be available in all SMEs. The need to hire new staff or train existing employees can be a considerable investment, and some SMEs may be hesitant to make this commitment,” says Chan.

This is where colocation service providers come in, offering transparent pricing models, flexible contracts and additional support services for set-up, maintenance and compliance.

Conventionally, SMEs tend to manage their own hardware and host it within their offices, but colocation services are on the rise. “As businesses upgrade their IT infrastructure, they are increasingly opting for colocation services or directly integrating with cloud solutions,” Chan says.

“The trend towards colocation and cloud services reflects a broader adoption of modern IT practices among SMEs. As the benefits of these solutions become more apparent, more businesses are embracing this shift to stay competitive and effectively support their growth.”

When choosing between cloud and colocation services, Ch’ng suggests that SMEs carefully evaluate the costs associated with each option. Cloud services typically offer a pay-as-you-go pricing model, which can be more flexible and cost-effective. In contrast, colocation requires significant upfront investment in hardware, software and licensing, which can lead to higher initial costs.

Scalability is another critical consideration, says Chan, as “cloud services excel at quickly adjusting resources without additional hardware, making them ideal for rapid growth or variable demand. In contrast, colocation requires purchasing and installing additional servers, which is costlier and less flexible.

“Scalability allows businesses to expand their hardware without constructing new facilities. Colocation centres also provide flexible bandwidth options and the ability to scale IT infrastructure as needed — often more cost-effective than maintaining a private data centre”.

Another important factor is security, according to Ch’ng. “A dedicated private network in the cloud may cost more than a shared public network in a colocation. If a platform service on the cloud is being used, there is a potential risk of data exposure among other platform users. A colocation will require a complete build-up of security, perimeter and internal, which can be costly.”

Moreover, while cloud providers invest heavily in digital security, relying on a third party for data management may not suit businesses with sensitive information. This is where colocation provides robust physical security and greater control over hardware.

It is also important to remember that colocation and cloud services can be symbiotic in nature. For example, says Ch’ng, “colocation can improve hybrid cloud infrastructure configurations by providing better availability to systems in the cloud for distributed computing architecture. Colocation can hold the data while cloud systems can perform the computing while providing scalability and new services. The cloud can provide lower latency connections for globally distributed systems such as IoT (Internet of Things) by having instances closer to the SME customer, while the data is still hosted centrally at the colocation”.

Chan concurs, adding that colocation data centres support cloud providers by enabling rapid infrastructure expansion and maintaining stringent security measures, which helps cloud providers deliver cost-effective, compliant services. This set-up enhances SMEs’ efficiency, reduces latency and supports their continued growth.

This is why Chan recommends a hybrid approach — one that uses “colocation for critical workloads and cloud for scalable applications, which can provide a balanced mix of security, cost efficiency and scalability”.

There are also legal and regulatory factors to keep in mind when choosing colocation data centres.

“Depending on the sector, there are always Personal Data Protection Act (PDPA) requirements and General Data Protection Regulation (GDPR) requirements to consider if they do business with the EU. If they have an ISO27001 rating, this would have to be reviewed if they decide to use colocation services,” says Ch’ng.

Given that the PDPA mandates lawful data processing and robust security measures, SMEs should confirm whether data is stored in Malaysia or overseas and understand data localisation requirements, says Chan.

“The ISO/IEC 27001 standard, which pertains to information security management, is a valuable certification for data centre providers. SMEs should seek providers with this certification to ensure high security standards. [Also,] under the Communications and Multimedia Act 1998, there are cybersecurity requirements to protect data from unauthorised access and other threats.”

For SMEs in regulated sectors such as finance or healthcare, industry-specific regulations such as those from Bank Negara Malaysia or the Ministry of Health must be met by the colocation provider.

To effectively manage operations in colocation data centres, SMEs will need to focus on several key training areas, says Chan. For starters, technical training is essential for handling hardware, network configuration and data backup.

Security skills are critical for cybersecurity measures and physical security protocols. Operational management skills such as capacity planning and vendor management ensure efficient resource use and clear communication with providers. In addition, soft skills such as problem-solving and a commitment to continuous learning will help these companies stay updated.

Knowledge of compliance and regulations is top-tier, particularly for industries that have specific legal requirements such as PDPA and GDPR, says Chan.

Encouraging more SMEs to adopt colocation data centres can be achieved through several strategic approaches. For starters, says Ch’ng, “programmes to recycle older on-premises servers for newer colocation servers would be attractive. Tax incentives or rebates may be encouraging as well. In my previous experience with colocations, a tour of the facilities was given to interested clients as well to build up trust.”

In addition to tax breaks, subsidies and other governmental incentives, flexible pricing models, trial periods and personalised consultations and support can make colocation more accessible too, according to Chan.

Throw in enhanced connectivity — a bigger appeal for SMEs in e-commerce — and there is plenty to appeal to the standard SME.

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