This is the second article in a three-part series on downtime.
In our last Managed Availability Memo column, we looked at downtime from more of a theoretical viewpoint, showing the differences between planned and unplanned downtime and detailing the threat that each potentially imposes on the welfare of an enterprise. Unplanned downtime, we noted, could devastatingly wipe out a company having no system protection in place. Nonetheless, repetitive instances of planned downtime - especially in organizations that have progressed beyond standard operational hours and have no means for system role-swapping - could gradually disrupt revenue streams and, over a period of a few years or less, impact greatly on profits and competitive advantage.
Now it's time to get down to financial facts. To really understand downtime, we must look at it from a cost perspective. Tangible costs are the hard or quantifiable costs associated with downtime. These include all costs associated with getting back to business after downtime; equipment damage and/or rental to get back online; marketing required to rectify tarnished image; lost or spoiled inventory; missed financial-filing deadlines and possible penalties; late-delivery penalties or added shipping costs; liability exposure relative to safety or health issues (including attorney fees); and compensatory payments relative to breached contracts.
Any meaningful calculation of downtime's impact should include the tangible costs, as applicable, noted above. But the best place to start when pinpointing tangible costs is with the "center-stage" categories of labor costs for idled workers and specific lost revenue. These two areas are fundamental and may represent the biggest hits on the tangible side of the ledger. Let's look at step-by-step formulas that will help us arrive at credible annual numbers for each category.
After lost revenue, the most readily apparent downtime cost comes from idled workers. So what's a good, basic formula for estimating annual labor costs from downtime?
Labor Cost = LA x LB x LC x LD
Now let's examine the components of the formula step by step.
- Determine the number of people impacted. (LA)
The number of people directly affected by downtime may vary from business to business. Instances of past downtime can be used as the basis for examining this area. Planned downtime is scheduled and predictable, and unplanned downtime usually has a "trauma" impact that underscores awareness of "who and what took the hit." Therefore, you should be able to zero in on fairly exacting figures. Don't forget to survey every group or department.
- Determine the extent of impact. (LB)
This part can be tricky. There may be swings in the degree of impact from department to department and from worker to worker within a department. Who continued working productively during a downtime event, who was handicapped, and who was completely shut down? We recommend that you estimate each group of workers' decline in productivity as a percentage of typical output. You may then review the averages of the different groups and designate a reasonable company-wide average, or you may choose to isolate your study by individual employee groups to attain a higher degree of accuracy.
- Determine the average employee cost per hour. (LC)
We suggest that you meet with human resources and financial personnel to zero in on the average employee cost per hour in terms of salary, benefits and overhead. You should look at each department and job classification, but the analysis can be made a little easier by combining work groups having similar job functions. You should be able to get fairly exact figures, as companies are in business to make money and the full cost of labor is a major and serious investment. When the numbers have been compiled, again, you will need to designate a reasonable company-wide average, or, again, you may choose to isolate your analysis to an individual employee group.
- Determine the number of annual downtime hours. (LD)
This area of your study should not present a major problem, but it is sometimes surprising how many companies are negligent in recording the details of serious events or maintaining logs on scheduled procedures. Documentation of downtime hours will certainly make the analysis of annual downtime labor costs a lot simpler - and accurate. This is one area where a "best guess" may send you too far off course. Remember, you are on a mission to assess financial risk that can be weighed against a certain level of Managed Availability investment.
Revenue is the lifeblood of any business. It is so fundamental to business that calculating lost revenue due to downtime should be something your organization can do relatively quickly and accurately, although assessing the impact of defecting customers while systems are down may not be so cut and dried.
The formula giving revenue loss depends on a variable "impact" factor (which we will explain) that colors the final results. So what's a good, basic formula for estimating annual revenue loss from downtime?
Lost Revenue = (RA / RB) x RC x RD
Now let's examine the components of the formula step by step.
- Determine gross annual revenue. (RA)
This certainly should not be a difficult figure to obtain. A visit with your financial department should get you on the right track. Be sure your final figure includes all areas of gross revenue, including products and services, because downtime is usually a company-wide hindrance. If your analysis is in the middle of the fiscal year, you might consider projecting revenue outcome based on industry/market trends and sales projections. If your organization has been beset by revenue swings over the last few years, averaging might be a good idea.
- Determine total annual business hours. (RB)
Total business hours can really vary from business to business. Some organizations may have little flexibility in their operational hours; others may be influenced by the need to hit production or revenue targets; still others, especially larger enterprises, may have operational hours that vary in accordance with different divisions and the number of remote employees. In short, the complexity of the business will dictate the difficulty in establishing a benchmark figure. It can be done, however, and, again, averaging might aid in the process.
Determine downtime impact factor. (RC)
Estimating downtime impact starts with a factor of 100%. You must then examine the order-rate activity for a given period immediately following the downtime event when the computing environment has returned to normal. The amount by which order-rate activity exceeds the typical pattern of orders per hour will yield an estimate of comeback business (customers). This comeback business can be calculated as a percentage exceeding normal orders per hour and subtracted from 100 percent, providing a more realistic estimate of impact because of the mitigating influence of loyal customers. If, for example, your online "designer-tie" business experiences a 32 percent bump in orders per hour for, say, the three hours following an outage, you may estimate the impact factor at 68 percent. This is not scientific thinking, but it does provide a logical framework for getting closer to the center of the target.Most companies eventually recover from an outage, and certain customers, although inconvenienced, will come back or recontact a business following a downtime event. Comeback customers reduce the impact factor. But some customers may never come back, opting instead to switch allegiances to a competitor. You must consider the defectors' "lifetime value," a term that describes the net present value of all purchases an individual defector might have made during the outage and in the future. Defecting customers increase the impact factor.
Assessing the impact of defecting customers - especially those who have a highly satisfactory buying experience with a competitor during your outage and therefore might be permanently lost - is not so easy. First, determining lifetime value is complex, necessitating a history of data. Second, and this is important, the future may not necessarily mirror the past. Aggressive brand building by strategic marketers can often reverse disadvantageous events. With all this in mind, you will likely have to make an educated guess at a percentage that most accurately reflects the impact factor of defecting customers. If, in our aforementioned "designer-tie" business, you were to designate an impact factor of 10 percent for defecting customers, your final overall impact factor would be 78 percent.
One thing you can be sure of: Despite the image-building skill of marketing departments, the longer your downtime event, the greater the propensity for permanently lost customers, leading to impact factors that may substantially exceed 100 percent.
Important note: Defecting customers and "lost opportunity" are synonymous. As we mentioned above, you may choose to make an educated guess at how much defecting customers increase your impact factor. Or you may prefer not to factor in the gray, "intangible" area of defecting customers. Be advised, however, that a bottom-line number that represents your total annual cost of downtime - including all tangible and intangible elements - should include some representation of lost opportunity, whether it is represented in the impact factor or identified separately as an intangible element. There is no right or wrong way. As you will see in next month's column, we have chosen to deal with "lost opportunity" as an intangible element.
- Determine the number of annual downtime hours. (RD)
We have already addressed this area, so we will not unnecessarily reiterate. We will, however, emphasize again the importance of downtime documentation and the potential danger in wild guessing, for benchmarking a fairly accurate number of annual downtime hours is fundamental to getting the right level of managed availability protection.
In our next Managed Availability Memo, "Downtime: Understanding It is Half the Battle - Part 3," we will conclude our in-depth review of downtime issues with a discussion of the "intangible" costs of system loss. We will also present a user-friendly "Annual Cost of Downtime Worksheet," a valuable tool for those ready to move forward in downtime cost assessment.
DM Review Online readers who wish to study managed availability issues and technology in greater depth may subscribe to Vision Solution's Business Continuity Solution Series at http://www.visionsolutions.com/BCSS.
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