A Quick Way To Calculate Your Cost Of IT Downtime
Often a basic requirement for Business Continuity analysis and cost-justification is calculating your cost of downtime.
To be sure, there are consultants that charge you a bundle to conduct a detailed analysis to help you figure out how much downtime costs your organization.
However, the following straightforward approach gives you a practical way without the big price tag to quickly determine your estimated cost of downtime and if the options you are considering are cost-effective for your operation.
Simply, you want to focus on four key factors:
- Lost productivity
- Lost profits
- Potential penalties, and
- Cost to recover.
While there may be other factors you wish to include in your assessment, these four will generally cover the areas that will cost you the most.
1) Lost Productivity
Direct Productivity
Indirect Productivity
Number of Shifts
This category considers your workers that cannot do their job because your IT technology is inaccessible.
Say you have 50 users dependent on your server. Their jobs may vary from data entry, ordering, processing requests, and many more. Once their applications are unavailable, they often cannot do the bulk of their work. This means you will also need to consider the percentage of their work that is impacted.
Let’s say they each make $40,000 per year. That’s about $19 per hour. With benefits, it may be more like $21 per hour. So, 50 users x $21 per hour x 100% of user productivity lost = $1050 per hour. Or, for every hour of downtime, you lost $1050 of direct productivity.
By direct productivity, these users are directly impacted. You may have other employees that are indirectly impacted. They cannot fully do their jobs for lack of key information or output from your technology. So, indirect productivity can be affected as well
In this example, say you have10 warehouse employees who no longer know what to pick to fulfill orders. Perhaps there are other jobs they can do, but picking and shipping orders may not be possible.
With indirect productivity lost, you and your team may need to estimate the indirect cost of lost productivity. If 10 warehouse employees earn $12 per hour, or $13.5 with benefits, you may estimate that they are impacted by a factor of 50% — they can do other tasks in the warehouse, and 50% represents the percentage you estimate their full productivity is affected.
In this example, 10 warehouse employees x $13.50 per hour x 0.50 = $67.50 per hour.
So far, in this example of lost productivity we have:
50 users x $21 per hour x 1.00 = $1,050.00
10 warehouse employees x $13.5 per hour x 0.50 = $ 67.50
Total Lost Productivity per Hour $1,117.50
Another important consideration is how many shifts your organization has. In this example, if this organization is completely down for 24 hours and runs two shifts, then $1117.50 x 8 x 2 = $17,880 is the estimated lost productivity for 2 shifts with 1 day of downtime.
2) Lost Profits
Lost Sales
Deferred Sales
Consequential Damages And Missed Opportunities
Estimated lost profits depend a lot on how your organization makes money. While this may sound like “duh,” consider that some companies may have the benefit of many days to process a sale while in others, orders exist in milliseconds.
For example, a business with project-oriented sales may be far less dependent on server uptime. If access to the server is lost, there are enough offline resources for the sales team to continue to operate until the server is back up. In a case like this the recognition of revenue may be delayed yet most likely not lost.
At the other end of the spectrum, if your business is dependent on e-commerce without backup, a lost transaction may be lost forever. As well as a customer.
With all that said, here are a few ways to estimate lost profit.
If your organization generates $100 million per year, consider $100,000,000 / (22 days per month x 12 months per year) = $378,789.
If your business is highly dependent on e-commerce, you lose on average $378,789 per day that your servers are down. If the bulk of your business comes in 12 hours in the day, you are losing $31,565 per hour. (While e-commerce may be up 24 x 7, most of the orders arrive in a range of 8-14 hours, depending on the business.)
Or, you may wish to consider Lost Sales by a transaction approach. For this estimate, divide annual sales by the number of sales per year to calculate average revenue per sale. Next estimate the number of sales lost due to outage. Multiply average revenue per sale x number of lost sales to calculate Lost Sales Opportunity.
Let’s say, your $100 million in annual revenue comes for 12,000 sales. $100, 000,000 / 12,000 = $8,333 average sale. If you generate an average of 45 sales per month (12,000 sales divided by 12 months divided by 22 days = 45 sales), you might have lost $374,985 (an estimated 45 lost sales x $8,333 per sale = $374,985) in 1 day of downtime.
If your business’s revenue is not so computer dependent, you may only have deferred profit loss due to delays in order processing and billing.
In this example, $378,789 with a 1 day of order processing delay with an annual 10% cost of money is $378,789 x .10% annual cost of money divided by 360 days in a year = $105 in lost profits.
So, what are your lost profits really costing you? Probably, based on this example, somewhere between $378,789 and $105 per day. This is where your management team has to weigh in to provide their assessment how downtime affects cash flow and profitability.
There may be other factors that affect lost profits. IT disruption can cause consequential damages and missed opportunities that include IT disruption, delayed EDI or electronic order processing, supplier penalties, impaired vendor relations, and more. Again, your management team is most aware of these issues and they need to weigh in on this aspect of downtime cost.
3) Potential Penalties
Organizations frequently face penalties for non-performance. While we can all expect to pay a penalty when we don’t pay our property tax or driving violation on time, your business has the same dilemma when it does not perform on time.
Certain industries operate within government regulations with well-defined non-compliant penalties. Larger buyers, such as Wal-Mart or General Motors, impose charge-back for non-performance, such as delayed EDI freight pick-up transmissions. It is safe to say in the coming years as we become more IT interdependent, you can expect your organization will face financial downtime consequences.
It is best for your management team to determine the current and projected costs for financial downtime consequences. They are the most knowledgeable ones closet to this subject.
4) Cost To Recover
The cost to recover will vary greatly depending on the Business Continuity planning your organization has completed.
With no planning, expect to pay premiums to rush the resources you need – if you can even get them. Consider the tornado in Joplin, Missouri of 2011. While I know of one technology consultant that had all of his clients protected with online backups so he could restore their systems on new onsite equipment within 40 hours (truly remarkable considering the damage), most businesses were unable to get any hardware for weeks let alone access to their backups. Why? First, in a matter of days, the roads and the airport close to Joplin airport were so clogged with relief aid there was virtually no inbound way to deliver any technology hardware. Second, with a huge influx of panic orders, there was a sudden shortage of hardware due to ship. If you could find the technology you could not get it into Joplin. In most cases, you had to wait for technology resellers to wait for new stock. Consequently, most businesses in Joplin were down for weeks.
At the other end of the spectrum, with proper planning and a solution like High Availability, you direct all your users to your target server. Then recover at a pace and price that makes sense.
You may have a good idea on the cost of recovering your IT department. You also want to get your management team to share their thoughts and estimates here as well. There are so many factors beyond IT that need to be considered.
Estimate The Total Cost Of Downtime
Once you have identified the potential costs per downtime, calculate your downtime cost per hour. Now you can evaluate the amount of time to recover – the amount of time it not only takes to get back up and running, but the amount of time it takes to get current – and multiply that by the cost of downtime.
In our example, we have:
Total Lost Productivity per Hour $ 1,117.50
Estimated Lost Revenue per Hour $31,565.00
Lost Sales ?
Consequential Damages ?
Potential Penalties ?
Cost to Recover ?
Estimated Cost per Hour $32,682.50+
So, in this example, this company loses at least $32,682.50 per hour of downtime.
Conclusion
Without spending the BIG BUCKS to hire a consultant to figure this out, you now have a pretty good idea how to estimate cost of downtime yourself.
This approach provides a straight-forward, cost-effective way to assess your cost of downtime, how fast you need to recover, and how current your mission critical data needs to be when you do recover.
With this information in hand, you are better prepared to assess the Business Continuity options that satisfy your business needs and make financial sense for your organization.
If you need help applying this approach to your situation or you want further information on Business Continuity, email me at blosey@source-data.com or call me at 800-333-2669. We provide a range of proven, cost-effective solutions and references to prove can we deliver on our promise to help you promptly recover your mission critical systems from downtime.