IT Freedom Blog

Determining your Company's Downtime Costs

by Jessica Baker on

Gartner reported in 2014 that downtime could cost your business $5,600 per minute, with a low-end average of $140,000 per hour and a high-end average of $540,000 per hour.

If these numbers are scary to you...they should be! Downtime is no joke, and that’s why it’s so important to know how much it could potentially cost your business.

Causes of Downtime

When we think about downtime typically our mind jumps to server failures and internet outages. But, these aren’t the only causes of business downtime. In fact, they aren’t even the two biggest causes of downtime, even though they can be the most expensive. The Ponemon Institute gives us the following data on the top causes of downtime.

Downtime Cause Percent of Downtime Events Average Total Recovery Cost
UPS System Failures 25% $709,000
Cyber Crime 22% $981,000
Human Error 22% $489,000
Utility Service Failure 11% $589,000
Weather Events 10% $455,000
Generator Failure 6% $528,000
IT Equipment Failure 4% $995,000

Calculating the Costs of Downtime

Lost Revenue Costs

How much revenue does your company generate in a day, an hour, a minute? Knowing this is essential to calculating your downtime costs. Lost revenue is dependent on earned revenue when everything is functioning as it should (aka uptime).
To calculate lost revenue use the following equation:

Lost Revenue = (revenue earned/hour) x (hours of downtime) x (uptime %)

Depending on your industry and business type your uptime % for a week will look different than others.

For example, if you’re a brick and mortar store only open 40 hours/week, your uptime % will be about 24%, but if you’re an online business with the potential to make a sale 24/7 your uptime % will be 100%.

So, say you are a business that earns $10,000 in revenue per hour and you experience 8 hours of downtime with a 24% uptime % your lost revenue equation would look like this:

LR = (10,000) x (8) x (0.24)
LR = $19,200/hour

Lost Productivity Costs

When your business is down you aren’t just losing potential revenue, you’re also paying employees who are unable to accomplish their work (aka productivity costs).  

Lost Productivity = (salary/hour) X (utilization %) x (number of employees)

This equation calls for you to calculate your utilization % of your employees during uptime. In other words, what percent of the work hours are your employees actually productive? If your employees are productive for 45 minutes out of the 60 in an hour, you have a 75% utilization %.

As an example, if you have 20 employees who, for the sake of simplicity, all make $35/hour, and are productive 75% of the time, your equation would look like this:

LP = (35) x (0.75) x (20)
LP = $525/hour

Now, the example above was simple, but there’s a good chance not all of your employees sit at the same salary levels, and they probably also have different utilization percentages. So be sure you’re doing the equation multiple times taking all those variables into account and then adding the costs together to find your total productivity cost.

Intangible Costs

“It takes 20 years to build your reputation and only 5 minutes to ruin it” - Warren Buffet

Now, while this may seem a smidge dramatic, any damage to your brand or reputation can cause irreversible damage.

These are what we call intangible costs and they can be really hard to put a definitive number on, so it’s really up to each individual business to determine the cost to your brand, your reputation, and your potential repeat sales from current customers.

We saw a good example of this in 2016 when a computer system outage caused Southwest Airlines to cancel and delay flights, ultimately delaying 2,000 flights with a possible cost to the airline of $54 - 82million. While Southwest is well...Southwest and they were able to resolve the issue and were back up and running within about a day, they still had to deal with the consequences. Consequences including angry customers, lost sales for that day, potential repeat sales, and all the costs to get them back up and running.

Since we all aren’t Southwest Airlines it’s important to realize that these intangible costs can add up pretty quickly for small businesses. Kaspersky reports that brand reputation damage can result in costs upwards of $200,000. It’s also important to keep in mind that this calculation will vary depending on total downtime and the downtime cause.

As John Kerns from Beecher Carlson says “Wall Street will forgive you for an uninsured earthquake or terrorism event, but it will not forgive you for operational failures that affect your reputation.” and what can be said about Wall Street can be said for most consumers.

Recovery Costs

This is the last piece of the equation, and another number that will vary depending on what it took to fix the root cause of the downtime. Here are some things to think about when coming up with your total recovery costs:

  • Did you have to replace hardware?

  • Did your internal staff have to work overtime?

  • Did you have to contract an outside firm to help with recovery efforts?

  • Did you have to pay a ransom to get any files back?

  • What was the value of any permanently lost data?

The answers to the above questions, and any other miscellaneous recovery costs we may have forgotten to mention, all go into the “recovery costs” part of the downtime equation.

Putting it all Together

Now that you have all the separate pieces, calculating your business’ total downtime cost is pretty simple.

Downtime Cost/Hour = (lost revenue) + (lost productivity cost) + (intangible cost) + (recovery costs)

As we’ve mentioned before, this is going to vary for businesses of different sizes, those in different industries, and will depend on the severity of the downtime. This is why having the equation is much more helpful in determining your specific downtime cost instead of a broad average spanning multiple business sizes and industries, that may end up being nowhere close to your actual costs.

Understanding these costs can help you make an informed decision on what precautionary measures you need to budget for to save you money in the long run. Being proactive will always be more affordable than being forced to be reactive.

 

Are you worried about your company’s ability to minimize downtime risks? Give us a call, we would love to help!

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