With colocation you are sending the hardware of your choice to be installed in a service providers facility. This is where the co - location comes in.
You can buy a server and have it shipped to the datacenter. Most will set it up for you, sometimes with a fee.
Now the catch is you are responsible for the hardware and any problems that result. If you lose a hard drive you now have to either repair it yourself or hire someone at the facility to find a replacement and repair your server.
If you have customized equipment, software or a very very large number of servers then colocation will give you the control over your environment you need. Otherwise, your probably better off leasing a dedicated server.