Introduction
What would an hour of downtime cost your business? As a business owner, I’ve had many slick salespeople try to convince me of things using huge formulas and best case scenarios for their cause. This article really breaks down the reality of downtime, the necessity of uptime and how it can work for your business.
As it relates to potential problems that could cause IT downtime within a small to midsize business (SMBs), it makes financial sense for business owners to understand how much outages cost to them. Uptime for SMBs using the Break/Fix IT Support Model is between 96% and 98% during business hours. On the surface, it sounds pretty good. A 96 average is an A+ in school, right? Well, in the world of Information Technology, a 96 is a huge FAIL. A network that is up 96% of the time is down 83.2 hours per year. Many SMBs don’t realize it, but the average small business loses more than $55,000 in revenue due to IT failures each year.1
Understanding the cost of downtime to your organization is a critical exercise in order to determine what kind of investment makes sense in implementing a backup and disaster recovery plan. Having a ballpark number allows organizations to use cold, hard facts to weigh their economic tolerance for how much data and downtime they can afford to suffer. This number brings into balance the investment they will choose in mitigating the risks.
Causes of Downtime
Before delving into cost, it is beneficial to understand the causes of downtime for a typical SMB. Most downtime falls into two categories: Everyday Issues and Site-Wide Issues.
Everyday Issues
Everyday issues usually account for 95% to 98% of downtime that SMBs encounter.2 These issues are often mundane, but are very costly just the same. Everyday issues manifest themselves in two main categories – obvious downtime and hidden downtime. An example of obvious downtime would be hardware issues, such as fried motherboards, hard drive failures and bad power supplies, can put your system down for quite some time. As the name implies, an obvious downtime keeps employees from working due to something that is undeniable and non-subjective. Like the frog in the boiling pot, hidden downtime are issues like a slow computer, slow Internet or slow printing. These are the types of issues that affect not only the bottom line, but also employee morale. A recent study by the Social Market Foundation found that happy employees were 12% to 20% more productive.3
Site Wide Issues
Site wide issues occur less frequently – but when they do occur, they can potentially have a huge negative impact for the SMB. These are the events that people immediately associate with the word “disaster.” They are catastrophic incidents such as floods, fires or natural disasters like hurricanes and tornadoes. When these disasters occur, their effects are rarely isolated to certain servers, but rather effect the entire organization. These types of incidents only make up about 2% to 5% of the problem.
Simple Calculation Case Study Example on Hidden Downtime: Small 10 Employee Company
We will begin with an average employee wage of $35,000 per year. We will assume that this employee takes two weeks off for vacation every year and that they make about $16.80 per hour before benefits. During a typical hour of work, their workstation is a little slow and causes them to wait a couple of minutes each hour. This translates to 16 minutes each day or 1 hour and 20 minutes over the course of a week. The weekly costs of these minutes would be $23.28. Over the course of a year, this would be $1,164.00.
Let’s extrapolate that over a 10-employee company.
- 3 employees @ $20,000 / yr = $ 60,000
- 4 employees @ $35,000 / yr = $140,000
- 2 employees @ $50,000 / yr = $100,000
- 1 owner @ $80,000 / yr = $ 80,000
Total Payroll of $380,000 / Year
A company with ten employees could lose almost $12,000 or more due to these little “wasted” minutes each year – OUCH!
Understanding the Cost of Downtime
Downtime tends to cost organizations most when it hits mission-critical systems or other systems that employees need to do their daily work. So, the basic utilities like Internet access, phones and email will all obviously take a large toll on the business when they’re down. But even when these utilities are up, businesses feel the financial impact when systems and applications go down or operate at less than optimum speeds. SMBs need to have a keen awareness of the cost of downtime and hidden downtime as well as a basic understanding of the dollar and cents consequences of the hard cost and less quantifiable soft costs. Below is a short list of the costs associated with downtime:
- Loss of transactional revenue
- Lost inventory
- Cost of repair
- Loss of employees and/or deflation in employee moral
- Loss of business opportunities
- Loss of goodwill from customers and/or vendors
- Damage to brand image and reputation
- Bad publicity
As was mentioned earlier the cost of downtime will vary widely from one small business to another. Understanding a meaningful and “close to reality” number for your business is essential for any good business owner or entrepreneur. Below is a formula for you to calculate the cost of your business and how it relates to downtime.
Formula for the Cost of Downtime
Revenue Lost
This one might seem trivial. Assuming revenue is generated online, simply divide yearly sales by 525,600 (60 min x 24 hours x 365 days) for average per-minute cost of downtime. So, the formula might look something like this:
Where t denotes the number of minutes of downtime
Cost of lost employee productivity as well as time employees cannot operate as usual
Where W denotes average hourly wage per employee and E denotes the number of employees affected by downtime
Cost of IT Recovery and time IT staff is busy getting your system back up and running
Where EIT denotes the number of employees engaged in IT operations and t’ denotes the time required to fix all affected systems and return to business as usual
Projected loss of revenue due to customer loyalty
For simplicity’s sake, let’s assume the business in question is not very high profile. So, projected lost revenue is calculated as a percentage of potential repeat sales.
Where r denotes the average repeat sales rate.
Projected loss of revenue due to damage to reputation as well as lost sales from customers researching the best deals and referrals
Where r’ denotes the percentage of sales referred by social media and other type client referrals.
So, a formula for total cost of downtime (TCoDT) might look something like this:
Where Rloss, Cprod, Crec, Ploss and Prev respectively denote lost revenue, cost of productivity, cost of IT recovery, projected loss of repeat sales, and projected loss due to damage to reputation.
Solution
Once downtime hard costs have been estimated, organizations can start to think about their tolerance for downtime and outages. The basic jest of these tolerances is to understand just how much the organization can be financially impacted without too much business disruption. Like all things in life, there is a balance that must be struck between mitigation of risk and the cost of mitigation of that risk. Below is a short list of items to consider when finding solutions to mitigate downtime risks:
- Backup and Disaster Recovery Planning
- Proactive IT Support
- Cloud Server Platform
- Resilient VoIP Voice and Data Planning
- Cloud Email Platform
A proactive IT Managed network with proper asset management and a properly fitted Backup and Disaster Recovery Plan is the first step to preventing downtime. An hour-long meeting with a trained professional could save the average SMB hundreds of thousands of dollars throughout the life of the organization. If you are currently working with a qualified professional, then you need to make them earn their stripes by helping you engineer a solution for your business. If you are not working with a qualified professional, you need to find one fast.
A quote comes to mind from John Wooden, “Failing to plan is planning to fail.”
Thanks so much for reading our blog. We hope you find it informative and useful. If you have comments or questions please email plong@askbis.com.
Respectfully,
Phillip D. Long
CEO
http://www.askbis.com/
plong@askbis.com
Business Information Solutions, Inc.
For more information about Business Information Solutions please visit the BIS Website. BIS, Inc. provides Network Consulting and Proactive IT Support for businesses in Gulfport and Biloxi MS, Mobile, Daphne, Spanish Fort, Fairhope, Gulf Shores, AL and Pensacola FL.
1 “IT Downtime Costs $26.5 Billion In Lost Revenue,” InformationWeek, May 24, 2011
2 “Most SMB Downtime Caused by Hardware Failures,” Midsize Insider, Feb. 21, 2013
3 “Study: Being happy at work really makes you more productive” Fortune Oct 29, 2015
