Every industry has a lifecycle.
First, it emerges as a new market when an innovation meets a demand. Second, it enters the growth phase after clear product-market fit is achieved. Third, it transitions to the stability phase as customers, suppliers, pricing, products, and supply chains stabilize into a reliable set of norms. Finally, it enters consolidation where a handful of major players dominate the market, many players are acquired, and most players fail and exit the market. Consolidation is exciting for the winners and acquired companies. Then the cycle renews with a new demand and new innovation.
Most people believe the data center industry is in the growth phase. We learn about new gigawatt deployment every week.
But really, our industry has entered stability. This is defined by hyperscalers establishing the norms of demand, supply consolidating to a few standard offerings, and increasing price pressure.
Why does this matter? Because your current pipeline is likely the last cycle you will complete before the data center industry consolidates.
What does this mean? Now is the time to get big, get good, or get out. At Empirix Partners, we’ve staked our business on the bet that the supply-led approach is the best strategy for success ahead of industry consolidation.
With so much to be gained or lost, what actions do you need to take?
Optimizing The Supply Chain: CFCI vs. OFCI
One key strategy to transform your supply chain is to transition from a Contractor Furnished Contractor Installed (CFCI) model to an Owner Furnished Contractor Installed (OFCI) model. While CFCI has been a standard approach for smaller scale deployments or new market entrants, offering deferred upfront spending and leveraging contractor expertise, it comes with substantial hidden costs at the scale that data centers are currently being built.
CFCI models can typically add 7-20% to total project costs, consuming capital that could otherwise be reinvested in growth initiatives. Consider a $500 million project (50MW build, $10M per MW) with an expected $35 million in CFCI costs. By shifting to an OFCI model, a company can eliminate various (average) markups and fees:
- General Contractor (GC) Equipment Markup: $14.0M
- GC Coordination Fee: $3.5M
- Electrical Markup: $11.2M
- Mechanical Markup: $2.8M
By recovering these costs, a company gains significant financial flexibility. This retained capital can be strategically redeployed into several different opportunities, allowing you to meet market growth demands and stay competitive:
- Equipment deposits: $9-12M per build
- Land banking: 5-10% of land cost
- Project contingencies: $25M
Beyond immediate cost savings, the OFCI model grants greater control over the supply chain and product selection. This control enables:
- Better quality assurance
- Potential for faster project timelines
- Improved negotiation power with suppliers
Preparing for Market Consolidation
As the market moves towards consolidation, companies that successfully implement these changes will be better positioned to compete. They’ll benefit from leaner operations and more efficient capital allocation.
Moreover, this supply chain optimization can serve as a foundation for scaling operations. The cost savings and operational efficiencies gained can fuel expansion efforts, potentially allowing a company to grow into a market leader (“getting big”) or become a highly attractive acquisition target (“getting out”) as consolidation unfolds.
As the data center market matures, companies must recognize the signs of impending consolidation and act decisively. By leveraging supply chain, businesses can achieve the operational excellence and financial flexibility needed to thrive in a consolidating data center market. This strategic move not only prepares companies for the challenges ahead but also positions them to capitalize on the opportunities that market evolution inevitably brings.
Call to Action
Now is the time to act, because your current pipeline is most likely the last cycle you will build before consolidation arrives.
Empirix Partners is custom-built to help data center providers thrive.
Let’s start the discussion.
Get the full scoop on consolidation prep by listening to our associated podcast:
