How to Calculate the Cost of Downtime
Jon Hayes | May 8, 2020
When we ask business owners and administrators, “How much downtime can your business tolerate?” the answer is often, “None.”
But when it comes down to where the rubber meets the road, they often are not sure how to calculate exactly what an hour of downtime is costing their business.
That’s what we’re going to cover in this blog post.
How to calculate the cost of downtime.
Let’s begin with the basics.
Why is Calculating the Cost of Downtime Important?
IT services professionals, like the team here at SKYE Technologies, want you to understand your downtime costs, because those potential expenses directly relate to the level of IT management, maintenance, and cybersecurity that your systems require.
For example, if you’re a Main Street store that sells men’s clothing, and you deal mostly in cash transactions, you may be able to get along with your calculator or a pen and paper for a while if your POS system suddenly crashes.
However, if you’re the manufacturer of the clothing that is sold by hundreds of Main Street stores across the nation, an hour of downtime is costing you some serious cash.
The global research firm, Gartner, estimates that downtime costs businesses in the USA an average of $5,600 a minute.
To avoid downtime caused by IT crashes or cybercrime, technology management, maintenance, and security protocols must be established and followed.
What Are the Elements Involved in Calculating the Cost of Downtime?
When we first bring up the topic of system downtime impact with clients and potential clients, their first thoughts often go to productivity loss and employee wages. While those are certainly key components of the downtime cost calculations, it’s important to factor in things such as:
- Problems with unhappy clients leading to brand and reputation damage
- Employee dissatisfaction resulting from downtime stressors
- Lost internal productivity
- Potential litigation, SLA penalties, and fines linked to regulatory infractions
- Depleted inventory from lack of production (manufacturing facilities)
- Cost of recovery
- Cost of data recovery or replication
Unfortunately, downtime is expensive.
But it’s not just in-house downtime that you have to consider these days. A lot of companies have revenue coming in from online sales.
Did you hear what Apple lost when their App store went down for 12 hours?
Now, your online sales number per hour may be far less, but how many sales can you afford to lose?
Carbonite, a big player in the data backup industry, tells us that when faced with downtime even small businesses can lose on average up to $427 per minute.
The good news is, that downtime avoidable. (We’ll talk about that in a few minutes.)
But let’s get to the formula.
What is the Cost of Downtime Formula?
Lost Productivity + Recovery Costs + Lost Revenue + Lost Opportunity + Intangible Costs (damage to client relationships, employee morale, and company image/brand) = Total Cost of Downtime
Let’s use a simple example:
If an accounting firm has twenty-five CPAs each billing out at $50 per hour and their in-house server crashes, they’re in trouble. To replace their server is going to take anywhere from five hours to three days, depending on where we have to source the new server.
So, taking the smaller number of downtime hours, let’s do our calculations.
25 CPAs billing out at $50 per hour gives us a lost productivity number of $6250 over five hours.
Add that to an equal $6250 for lost revenue for those five hours, plus the cost of a service call, data recovery, and a new server, and that accounting firm is looking at nearly $18,000 in downtime costs.
What haven’t we accounted for?
Lost opportunities and intangible costs…which in the end, could add up to be much more expensive than the initial $18,000 in calculated downtime losses.
What Are the Major Causes of Downtime?
With the exception of manufacturing facilities that depend on some mechanical processes, most downtime can be attributed to IT issues.
Things like hardware failure, apps that freeze up, network slowdowns, ransomware, and hacks can take a business offline fast.
But it’s not just the technology itself that can be the cause of downtime. IT questions and troubleshooting requests that go unanswered can cause a business to spin their wheels for hours – losing money every minute that goes by.
Regularly, SKYE Technologies gets phone calls from companies that are not yet our clients, wanting us to come quickly because some element of their IT is down and everything has crashed.
We’re glad to help them out of a bind, but it’s better to put a small amount of money into IT management, maintenance, and security up-front, than to suffer potentially catastrophic downtime losses.
How Can Companies Avoid and Mitigate the Cost of Downtime?
Proactive management, maintenance, and cybersecurity are the keys to avoiding 99% of IT downtime issues. By addressing problems with outdated hardware, unprotected software, and unsecured networks, an IT services team can drastically lower the risk of your business suffering heavy downtime costs.
Mitigation of downtime expenses is a different story.
If your business is struck by lightning or impacted by flood, fire, or storm, you need to get things up and running right away – either on-site or in a secondary location.
The way to cut down the amount of downtime you’re going to suffer is to have a communications plan in place and to have a previously implemented Business Continuity and Disaster Recovery strategy to kick into gear.
Your communications plan will allow you to stay in touch with employees, suppliers, and customers – keeping everyone informed.
Your Business Continuity and Disaster recovery strategy will provide you with both the steps and the backed-up IT resources to get rolling again either on-site or in that emergency secondary location.
Ready to talk to someone about avoiding the cost of downtime and implementing a proactive management, maintenance, and security? Give us a call or send an email to begin a no-obligation conversation with the SKYE Technologies team.
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