If you’re preparing a technology budget, it’s important you know any costs associated with IT downtime. Such information helps business to identify critical systems, and prioritise IT expenditure to ensure you keep those systems healthy, and running efficiently. Knowing your downtime costs can also motivate a business to create a continuity and/or disaster recovery plan, if you haven’t done so already.
Whilst there are a few different ways to calculate direct and indirect costs incurred from IT downtime, here are some basics that you can easily customize to your business.
Direct Costs of IT Downtime
These are the expenses you can easily quantify and attribute to a specific downtime event. They might include:
• Lost employee productivity: How much money was lost because employees couldn’t work during an IT downtime event? Calculate by using this equation: Money lost = (Avg hourly wage for affected employees) x (Number of affected employees) x (total hours of IT downtime)
• Cost of employee work resumption: How much would you spend to catch up on work once your IT downtime event had been resolved? In addition to standard employee wages, include additional expenses such as overtime. Use this equation: Cost of work resumption = (Avg hourly wage for affected employees) x (Number of affected employees) x (Hours spent on workload catch up)
• Cost of IT recovery: How much money was spent resolving your IT downtime event? This should only account for the time spent by your in-house IT staff or your IT service provider to fix your issues. Don’t include costs for any replacement hardware or software. If you have in-house IT staff use this equation: Cost of IT recovery = (Avg hourly wage of IT staff) x (Number of IT staff working on issue) x (Hours required to resolve downtime)
Indirect Costs of IT Downtime
These are not as easy to quantify, but can be calculated using a figure that represents lost revenue from an IT downtime event. To determine this figure, use this formula: Revenue lost = (Annual revenue/8,760 hours per year) x (Hours of IT downtime)
After calculating lost revenue, you can use two methods that help you determine your indirect costs:
• Projected lost revenue due to lost customers: Represents estimated money lost due to customer’s inability to spend during IT downtime. Combine the metrics of your average sales per business hour, and the average of a repeat sale. Calculate it with the following two step formula: ((Avg sales per hour) x (Total hours lost due to IT downtime)) +((Total hours lost due to IT downtime) x (Average rate of repeat sales))
• Projected lost revenue through damaged reputation: Estimates money lost from potential customers who abandoned you during your downtime event. Use your metric of the percentage of sales you gain from referrals, such as social media, comparison sites etc. The equation is: Projected lost revenue = (Total Revenue lost during downtime) x (Percentage of sales from referrals)
Using the Calculations
Using the above calculations will help you determine your indirect costs of downtime. Helpful when you want to gauge the impact of a hypothetical IT downtime event on your business.
The total estimated costs of your IT downtime event can be assessed by adding together all direct and indirect calculation results. Feel free to add any others applicable to your business. It’s also helpful to use the calculations to estimate the downtime costs incurred if specific applications, services, or IT components experience downtime. For example:
- Critical business apps such as web-based e-commerce, MYOB or Zero, even Salesforce or another CRM.
- Programs used by large numbers of employees as part of their primary job functions.
- Business Technology apps or services that employees use to perform their roles. Such as email, SharePoint, network shared resources.
- Components in your IT infrastructure. Servers, computers, networks, and communications
By identifying the applications, services, and IT components that are critical to your business, you can budget accordingly and keep them running at peak efficiency. By knowing what IT downtime will cost you, your business is much more aware of what you’ll lose if you don’t look after your key IT assets.