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05 Jan 2017

IT Support – What is Downtime Really Costing your Business?

When looking at your IT support and options to enhance it, have you considered the impact of downtime? This is something that every business should consider. A good time to do this is when preparing or reviewing your overall budget. This information can help you prioritise the aspects of IT you need to focus on. By doing this, critical systems and operations receive the budget needed to keep them running efficiently. If you have not got a disaster recovery plan in place, understanding the downtime costs will help drive any business to create one.

There are many different ways to calculate the direct and indirect costs incurred from downtime. The calculations below are basic ones that you can easily customise for your business.

Calculating the Direct Costs of Downtime

Any direct costs of downtime are the expenses you can easily quantify and attribute to a specific downtime event. They include:

  • Employee productivity: When employees cannot work due to downtime, understand the cost of this. Calculate this using the following equation: Cost of lost employee productivity = average hourly salary for the employees affected x number of employees affected x number of hours of downtime.
  • Employee recovery: This figure represents the amount of money spent to catch up on work once the IT component has been restored. Besides the basic employee wage, you need to include any additional expenses, such as overtime pay. The basic equation is: Cost of employee recovery = average hourly salary for the employees affected x number of employees affected x number of hours spent catching up.
  • IT recovery: Understand the cost of getting the IT component working again. It should only account for the time spent by the in-house IT staff or IT service provider to fix the problem. You don’t need to include the cost of any replacement hardware or software. For example, if in-house IT employees fixed the problem, you can use the equation: Cost of IT recovery = average hourly salary of in-house IT employees x number of IT employees working on the problem x hours required to fix the IT component.

Calculating the Indirect Costs of Downtime

To quantify the indirect costs associated with downtime is not easy. The figure represent the amount of revenue lost. The equation to determine this figure is: Revenue lost = annual revenue/8,760 hours per year x number of hours of downtime.

After you calculate the amount of lost revenue, you can determine the indirect costs. Two common calculations are:

  • Projected loss of revenue due to lost customers: How much money was likely lost due to customers leaving? One metric you can use is the average rate of repeat sales. You can calculate it with the following equation: Projected loss of revenue due to lost customers = revenue lost x average rate of repeat sales.
  • Projected loss of revenue due to damaged reputation: If a potential customer is scared away, how much money was lost? One metric you can use to calculate it is the percentage of sales from referrals. The equation is: Projected loss of revenue due to damaged reputation = revenue lost x percentage of sales from referrals.

Using the Calculations

Calculating the direct and indirect costs means you can determine the total cost of downtime. This is helpful if you want to know the cost of an actual downtime event. You can even use this to see the impact a hypothetical downtime event might have on your business.

Add together all the direct and indirect downtime costs to derive the total cost of downtime. If you want to include all the direct and indirect costs mentioned previously, the equation is: Total cost of downtime = cost of lost employee productivity + cost of employee recovery + cost of IT recovery + projected loss of revenue due to lost customers + projected loss of revenue due to damaged reputation.

For budgeting purposes, it helps to look at the downtime costs incurred when individual applications, services, or IT components are unavailable. For example, you might calculate the direct and indirect costs (or just the direct costs for simplicity) of downtime separately for:

  • Critical business application (used by large numbers of employees as part of their primary job functions or applications that are crucial in day-to-day operations, e.g. billing)
  • Important technology application or service (that employees use to help them perform their jobs, e.g. email)
  • Component in the IT infrastructure (such as servers, computers, network and communication capabilities)

That way, you can determine which applications, services, and IT components are most critical to your business. With this information, you can budget the funds needed to keep them running at peak efficiency.

 

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