The Rack Report

Changes in Latitudes, Changes in Attitudes - Data Center Dilemma

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By Martin Peck, Partner, Rackhouse

The great Jimmy Buffet said it best.... "Changes in Latitudes, Changes in Attitudes, nothing remains quite the same......"  And so it goes for traditional channel partner agreements within the data center and colocation industries as they relate to real estate representation. Wikipedia defines a channel partner as... "a company or individual that partners with a manufacturer or producer to market and sell the manufacturer's products, services, or technologies."

I have been through this before.  In 1996 I was hired by the largest real estate company in the US to start a "user representation" division for office tenants.  It was completely contrary to the hard-line developer/owner mentality that presided within the company at that time.  However, to their credit, my old employer realized that space users needed an advocate; they needed someone that could steer them through the pitfalls and confusion of the deal process.  Today, that division is one of the most profitable in the company and 98% of all real estate lease transactions are contracted with a "tenant rep" broker in the mix.

The "channel partnership" is usually done through a co-branding relationship. Typically, channel partners are compensated on a referral basis by steering data center or colocation prospects specifically to only those data centers whereby they have partner agreements in place. These types of arrangements may work for certain vendors within the data center and colocation industry but they won't work for those in the commercial real estate industry, especially those that specialize in the critical facility arena.

Companies of all sizes, whether they are locally owned or international enterprise organizations, have come to the realization that they can achieve significant savings and efficiencies by outsourcing their real estate functions.

The ability to have others perform such functions as facility management, property accounting, project management and transaction management allows these companies the ability to focus on their core business...not real estate. With this in mind, it is paramount to understand that when a company outsources these important functions, they are in essence relying on others to become their "dotted line" real estate organizations.

Rackhouse's customers outsource their data center/colocation transaction management needs to us.  We support this function via two platforms, our tenant representation business, Rackhouse, and an interactive web portal called MyRackFinder.  We represent companies and organizations in their search for suitable data center sites and facilities across the country. We are solely focused on serving as an advocate to the user/tenant side of a lease transaction.

Our experience in this platform ranges from representing companies who lease space in a powered shell environment, to a free standing build-to-suit facility, to cage space within a colocation facility. We are hired by our customers through an exclusive agreement to be, in essence, "facility" neutral.  It can be no other way.  

Pre-arranged channel partner agreements become a severe conflict of interest in our ability to adhere to the fiduciary relationship we owe our customers.  Our service offering goes way beyond the gathering of market information and referring that information to others.  In our role as advocate, our customers rely on us to run a consistent process to achieve their solutions regardless of location. At Rackhouse that process is known as "SeveNines^TM". SeveNines^TM encompasses the following functions:

• Define project requirements
• Issue a request for information ("RFI") to all the "contenders" in the marketplace
• Perform a market survey among the "contenders" in order to separate them from the "pretenders"
• Financial analysis
• Issue request for proposals ("RFP") to the "contenders"
• Issue a comprehensive letter of intent ("LOI") to the finalist
• Final document negotiation and lease review

As to our compensation for these services, we are hired to represent the tenant/user. Our fee is paid by the eventual data center or colocation facility owner/operator, typically as a portion of the gross revenues across the term of the transaction. The terms and rates for these fees are driven by the market and are paid on a deal by deal, market by market, project by project basis.

Hopefully, this will provide a better understand of why an ongoing channel partner agreement will not work in the world to come.  Our clients demand more service.  Our role is to create a competitive environment whereby facility and service providers compete for our customers business. When our process is run properly, both tenant and landlord win.  This is the future for the colocation and data center market; as such, our goal is to educate space providers across the US, gain mutual respect between our organization and the colocation provider and to help both sides close transactions.    

The great news is that there are no "bad guys" in these scenarios, there is just a need for further and deeper communication and understanding on all fronts. I'll end with the last two lines from the chorus I started with from our buddy Jimmy Buffet ..... "With all of our running and all of our cunning.... If we couldn't laugh we would all go insane."

Let's have some fun and make a lot of deals together!

photo by:  http://www.flickr.com/photos/john-pozadzides/