Typically, a colo provides the building, cooling, power, bandwidth and physical security while the customer provides servers and storage. Space in the facility is often leased by the rack, cabinet, cage or room. Many colos have extended their offerings to include managed services that support their customers' business initiatives.
There are several reasons a business might choose a colo over building its own data center, but one of the main drivers is the capital expenditures (CAPEX) associated with building, maintaining and updating a large computing facility. In the past, colos were often used by private enterprises for disaster recovery. Today, colos are especially popular with cloud service providers.
For some organizations, colocation may be an ideal solution, but there can be downsides to this approach. Distance can translate into increased travel costs when equipment needs to be touched manually and colo customers can find themselves locked into long-term contracts, which may prevent them from re-negotiating rates when prices fall. It is important for an organization to closely examine their colo's service level agreements (SLAs) so as not to be surprised by hidden charges.