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 primarily include the:
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- 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. However, they tend to far outweigh the cost of employee wages during a downtime event. Two common calculations for indirect costs are:
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- Projected loss of revenue due to loss of repeat 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 estimated percent reduction in repeat sales. You can calculate it with the following equation: Projected loss of revenue due to lost customers = (Monthly revenue from repeat sales) x (estimated percent reduction in 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 estimated percent reduction in new sales. You can calculate it with the following equation: Projected loss of revenue due to damaged reputation = (Average new revenue per month) x (estimated percent reduction in new sales)
Using the Calculations
Using the direct and indirect cost calculations, you can determine the total cost of downtime. 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 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. For example, you might decide to invest heavily in solutions designed to prevent and recover from a Cryptolocker event, which can result in the loss of all your business data.
For more on developing an IT budget that ensures you adequately protect IT components or services critical to your business, click here or contact us.