Calculating The Costs Of I.T. Downtime

One of the challenges that is faced by IT administrators when they are fighting for the budget needed to maintain all of the network systems, security protocols and backup systems is quantifying for management the potential losses which will be avoided if the expenditures are made.  It is hard for non IT people to fully understand the total impacts which an I.T. failure may have and to put them into a figure which can then be compared to what the protections might cost.

 

Here's a way to build an estimate of what IT downtime could cost based upon your company's own figures.  

In each of the steps below substitute for the example numbers with those of your own company for a more accurate estimate.

Assuming that your company staff works on average 250 business days per year over an 8 hour day (approximately 2,000 business hours).

Sales impacts: 

Annual Sales = $_____________
Divide by 250
Daily sales cost of total downtime = $____________
 
Divided by 8
Hourly Cost of Downtime = $_____________
 
So for example, ABC Company is projected to have annual revenue of $6.5M this year.

Annual Sales = $6,500,000
Divide by 250
Daily cost of total downtime = $26,000

Divided by 8
Hourly Cost of Downtime = $3,250

The cost of ABC Company's downtime is $3,250/hour.

Employee costs:

Assume that there are 50 employees using the I.T. system in our sample company.  Each of who work 8 hours per day for 250 days per year.  Assume the average payroll cost for each employee is $25.00 per hour.  (Payroll cost is the total of wages, benefits, vacation costs, training costs, employment insurance costs, other payroll taxes and  hiring costs. You can see from this list that the hourly rate shown is probably conservative for most companies.)

Number of employees affected:  X _____________

Average payroll cost per employee:  Y _____________

Number of hours systems are unavailable:  Z __________

Total system failure cost:  X times Y times Z = Total ________________

For our example the calculations are:  50 x $25.00 x 8 (one day) = $10,000 or $1,250 per hour

The estimated employee costs for ABC company are $10,000 per day or $1,250 per hour.

Recovery costs:

There are costs to recover the systems, both in labour for internal staff, potentially for out side IT support, software tools and maybe for hardware.

Number of internal IT persons involved: A __________

Average internal IT cost per hour: B ___________ 

External support hours used: C______________

Cost per hour for external support: D_____________ 

Software needed or purchased: E $___________

Hardware purchases: F $_____________

Total cost of recovery: (A x B) + (C x D) + E + F = 

Again using our one day example let's assume the whole issue has been resolved with a days work and everything is up and running.  Let's assume that there was no need for software or hardware to be purchased but that a days work for an external resource was used.

Total cost of recovery:

((1 x $50) x 8)=$400 + ((1 x $150) x 8) = $1,200 + $0.00 + $0.00 = $1,600/day or $200 per hour

The estimated recovery costs for ABC are $1,600 per day or $200 per hour.

Summary of costs:

When we total each of the above three categories of direct and indirect costs the value of a total IT downtime situation can be estimated.

Sales costs: $26,000 day $3,250 hour

Employee costs: $10,000 day $1,250 hour

Recovery costs: $1,600  day $ 200  hour

Total costs: $37,600 day $4,700 hour

The total estimated I.T. downtime costs for ABC company are $37,600 per day or $4,700 per hour.

Calculate your own estimate

When you see how quickly the costs of IT downtime can add up it is easily understood why it is valuable to calculate your own potential and build an estimate for your company.  Perhaps the potential of a failure completely wiping out your sales for a set period is not real.  If not apply a probability factor to approximate how much potential there might be for this impact.

Do the same for each of the other cost categories and build your own total.

When these kinds of estimates are compared to the costs of specific or a pool of IT security and disaster protection costs it is easier to determine whether the pay back from the prevention investment might be of value.  The monthly cloud backup invoice or the redundant server package or whatever will be able to be put into a context of what might be the costs without such security or protection.  

What is the right amount to be spent for prevention?

This is always the tough question to answer but with some reasonable estimates in mind it becomes easier. In the case of our ABC example an expenditure of only 5% of the estimated potential daily cost of a serious IT downtime event could provide a budget of $1,880 which could be applied to putting better protections in place.  With 20 working days per month this is only $94 a day spent.  The daily potential savings from events avoided are thousands of times greater.  If the right systems are put in place it can be seen that the potential pay back can be substantial for low upfront costs.

Have you calculated your I.T. downtime estimate?  How much could you spend to avoid these costs?