How Much Does Downtime Really Cost?

Why is it difficult to justify an investment in business resilience when the risk and costs of downtime are so high? One reason is because the current business environment insists on clearly demonstrated financial returns on investment. The other reason is because the risks and costs are not well understood. 

Despite advances in infrastructure robustness, occasional hardware, software and database downtime is unavoidable. In fact, Dunn & Bradstreet reports that 49 percent of Fortune 500 companies experience at least 1.6 hours of downtime per week. That translates into more than 80 hours annually. How would your customers react to an 80-hour outage? 

There are options for reducing total downtime, in some cases almost to zero, but none of them are free. Hence, organizations must determine whether these options are worth the cost given the financial impact of downtime. Put differently, each organization needs to decide what losses it is willing to accept due to outages and design a solution to avoid this worst case. Average downtime costs vary considerably across industries, from approximately $90,000 per hour in the media sector to about $6.48 million per hour for large online brokerages. Downtime costs also vary significantly within industries. Business size is the most obvious factor, but it is not the only one. For instance, companies that can revert to manual processing can continue to function when their systems are unavailable, although usually at an appreciably lower level of activity. In contrast, some companies, such as online retailers, cannot conduct any business during system downtime. Similarly, certain manufacturing businesses must destroy all of the work in progress (such as food and pharmaceuticals).

To gain a firm understanding of the financial impact of downtime, examine the various subcomponents of downtime costs: revenue, human resources, regulatory and compliance, remedial and reputation impact.

Almost all companies now use IT to record sales. Some organizations, such as low-volume, high-value manufacturers, may still be able to take and fulfill orders manually. However, most retailers and high-volume manufacturers can no longer complete the sales process when their systems are unavailable. This is especially true for Web-only stores whose entire order-taking capability stops when their systems are offline.

A company’s average sales per hour, adjusted to account for the percentage of sales that can and likely will be completed manually during a system outage, can be used to estimate the revenue that will be lost per hour of downtime. However, this yields only a very rough approximation.

Not all of the sales that would have otherwise occurred during a downtime event will be permanently lost. Some persistent customers will wait for their preferred vendor’s systems to come back online rather than switching to a competitor.

If an outage creates a disruption in a supply chain with a high level of expectation in responsiveness (i.e., medical services or overnight delivery), the business may be exposed to damages. Often, damages stem from the inability to deliver (i.e., loss in delivery fees due to arriving late or lawsuits due to collateral damages). These highly publicized situations can impact shareholder value.

On the other hand, the value lost when loyal (or potentially loyal) customers do switch to a competitor is more than just the value of the purchases that would have been made at that time. It amounts to the lifetime purchases those customers might have made.

Another significant downtime cost is lost employee productivity, which can be measured in terms of the salaries, wages and benefits of idled people. If, for example, the work of 1,000 people earning an average of $60 per hour, including benefits, depends on a system that becomes unavailable for one hour, the value of the lost productivity can be estimated as $60,000 for that hour. The estimate might be somewhat lower if some employees are still able to do a portion of their work manually or switch to tasks that require only systems that are still available. Nonetheless, many organizations have become so dependent on IT that an unavailable system totally idles a significant portion of the enterprise, when the old manual processes often no longer exist. For instance, What happens when email goes down? What happens to that new cost-saving voice-over Internet protocol system when the LAN goes down?

Subject to the above caveats, the following is a quick formula for estimating hourly downtime labor costs:

Hourly Labor Cost = P x A x C

Where:

P = number of people affected

A = average percentage they are affected

C = average employee cost (salaries or wages + benefits)

Increasingly stringent regulations require organizations to safeguard the availability, reliability and privacy of financial, human resources and customer data. In addition to government regulations, many companies now include service level agreements in the contracts they sign with their customers and business partners. Failure to fulfill the conditions of an SLA can lead to the imposition of substantial penalties. In addition, the regulatory and contractual fines that may result from an inability to perform business functions vary widely, but can be substantial.