In today’s hyper-competitive hosting environment, the disparity between the major players and small to mid-sized providers is significant. What’s the cause of this disparity? It comes down largely to scale. Large hosting service providers like Amazon and Rackspace are able to keep their CAPEX at a minimum thanks to the close relationship and buying power they enjoy with hardware technology vendors and resellers. As a result, they can purchase the necessary IT hardware—the primary cost in any data center operation—for significantly less than what small and mid-sized providers pay.
For those on the other end of the spectrum, this represents a significant competitive disadvantage. Negotiating favorable agreements with hardware resellers is almost impossible due to rampant price discrimination, a lack of transparency, and a biased system of manufacturer incentives.
So how can small to mid-sized hosting service providers hope to compete? The answer comes down to careful financial management and targeted strategic initiatives. By focusing their efforts in the right direction, these aspiring providers can close the gap between themselves and the giants, and maybe even attract an acquirer of their company in the process. To achieve that lofty goal, they should focus on improving the following three essential key performance indicators or KPIs.
KPI #1: Annualized Net Revenue Per Average Megawatt of Power Utilized
Throughout this piece, we will use Rackspace as an example because not only are they one of the larger hosting service providers in the game, they are also one of the savviest–despite their choppy performance on Wall Street. The company generates annually an astounding $62.5M per average megawatt of power utilized and $1,412 ARPU (Average Revenue Per Unit) on a monthly basis. In other words, Rackspace has been successful in standardizing and consolidating their server deployments to achieve significant gains in efficiency and density.
Small to mid-sized hosting service providers can improve their own annualized net revenue per average megawatt of power utilized by making strategic purchasing decisions. However, to accomplish this with the granulated accuracy the process requires, it takes a macro-level tool that illustrates the relationship between hardware expenditures and revenue. Once that tool is in place, smaller providers can measure their own performance against a company like Rackspace and adjust strategic initiatives accordingly.
KPI #2: EBITDA Margin
Rackspace has also been successful in maintaining its EBITDA margins on average around 34%. There is a direct link between EBITDA and CAPEX; the right choice of IT equipment deployed has a direct relationship in driving ARPU and efficiency higher, while at the same time increasing automation, orchestration and lowering operational costs.
EBITDA is a key driver of valuation, meaning that small to mid-sized hosting service providers hoping to attract a buyer need to do everything possible to maximize margins. The formula for improving EBITDA margins is as simple as minimizing costs and maximizing revenue. Hosting providers with fewer resources should focus on lowering their hardware costs and increasing the value and efficiency of their data centers. This strategy, more than any other, attracts the attention of buyers.
KPI #3: Total Customer Gear as % of Revenue
As we mentioned earlier, IT hardware is the primary driver of data center costs. Therefore, maximizing the value of that hardware needs to be a core goal. Rackspace managed to lower the cost of their customer gear (hardware) as a percentage of revenue to 17% (some quarters to as low as 12%). For a company with 113,000+ servers in its arsenal, that figure is outstanding to say the least. Rackspace has been able to slash this figure so significantly mainly by leveraging economies of scale. Simply put, they pay less for each individual server because they standardize and purchase them in high volume and treat their servers like “cows not puppies”.
Reducing hardware costs in a big way has traditionally been a challenging proposition for small to mid-sized hosting service providers. There is no way to match the order volume of the major players, and resellers have little incentive to cut breaks for low volume orders. Thanks to evolving group-buying pools, however, smaller hosting service providers can match the purchasing power of their larger competition and start to whittle away at their customer gear costs as a percentage of revenue.
Tuangru Optimizes KPIs
Our team at Tuangru has a solid foundation in the hosting industry, and we know from experience that providers who don’t make the three previously mentioned KPIs as their primary metrics of focus can never reach their full potential. That is why we have created a program specifically designed to help small to mid-sized hosting service providers improve these KPIs and keep pace with the titans in the industry.
Are you interested in learning more ways to remain competitive with big industry names like Microsoft and Google? Join us for our panel discussion David vs. Goliath: How to Compete with the Big Players on Sept. 17 at The Hosting + Cloud Transformation Summit (HCTS) in Las Vegas, Nevada. Myself, along with industry experts from Solidfire, Pivot3 and more will share the best techniques and strategies for ensuring success in today’s highly competitive atmosphere. #451HCTS