Knowing the costs associated with downtime can help you prioritize IT spending within your technology budget. Learn how to calculate both the direct and indirect costs resulting from downtime.
When preparing your technology budget, it is useful to know the costs associated with downtime. This information can help you prioritize IT expenditures so that critical systems and operations receive the funding needed to keep them running efficiently. Knowing the downtime costs can also motivate you to create business continuity and disaster recovery plans if you have not created them yet.
There are many different ways to calculate the direct and indirect costs incurred from downtime. The calculations presented here are basic ones that you can easily customize for your business.
Calculating the Direct Costs of Downtime
The direct costs of downtime are the expenses you can easily quantify and attribute to a specific downtime event. They include the:
- Cost of lost employee productivity: This expense captures how much money was lost because employees could not work during the downtime event. It can be calculated using the equation: Cost of lost employee productivity = (Average hourly wage for the employees affected) x (Number of employees affected) x (Number of hours of downtime)
- Cost of 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 wage for the employees affected) x (Number of employees affected) x (Number of hours spent catching up)
- Cost of IT recovery: This expense depicts how much money was spent to get 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. It should not include the cost of any replacement hardware or software. For example, if in-house IT staff fixed the problem, you can use the equation: Cost of IT recovery = (Average hourly wage of in-house IT staff) x (Number of IT staff working on the problem) x (Hours required to fix the IT component)
Calculating the Indirect Costs of Downtime
The indirect costs associated with downtime are not easily quantifiable. They are usually calculated by using a figure that represents the amount of revenue lost from a downtime event. 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: This expense represents how much money was likely lost due to customers leaving because of the downtime event. 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: This figure estimates how much money was lost due to potential customers being scared away because of the downtime event. One metric you can use to calculate it is the percentage of sales from referrals (e.g., referrals through social media and shopping comparison sites). The equation is: Projected loss of revenue due to damaged reputation = (Revenue lost) x (Percentage of sales from referrals)
Using the Calculations
Using the direct and indirect cost calculations, you can determine the total cost of downtime. This is helpful if you want to know the cost of an actual downtime event or when you want to see the impact a hypothetical downtime event might have on your business. The total cost of downtime is derived by adding together all the direct and indirect downtime costs you feel are applicable to your business. For example, 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:
- Each critical business application (programs used by large numbers of employees as part of their primary job functions or programs that are crucial in day-to-day operations, such as billing software)
- Each important technology application or service (programs and services that employees use to help them perform their jobs, such as email software)
- Each component in the IT infrastructure (servers, computers, networks, and communications 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.