Leadership

How to calculate and convey the true cost of downtime

The next time you want to drive home the importance of maintaining a stable technical environment, give your staff solid evidence of the true cost of system downtime.

IT managers who want to emphasize the importance of maintaining a stable technical environment need to look no further than the company bottom line. System downtime, whether it affects an individual user or an entire company, means lost money. Understanding downtime costs may help your staff members think twice the next time they want to bring down a server for maintenance during business hours. You can download our downtime spreadsheet here.

How do you define system downtime?
IT pros have different definitions of the term “downtime.” My own definition is “system unavailability.” Even though an application may be “up and running,” it is essentially “down” to a user if the application can’t be used, no matter what the reason.

There are varying degrees of system downtime, especially in a large networked environment. For example, a medical provider company that operates many clinics in several states has at least three levels of downtime: individual user, all clinic locations, and across the enterprise.

In addition, it’s possible for some technology services to be available while others are not available when applications are distributed over multiple servers within a company’s infrastructure.

Identifying technology components
With so many different variations, it makes sense to identify each technology component of significance and to develop a cost impact for each. Technologies typically fall into one of three categories:
  • Business applications are the applications that company employees use to do their primary job function. For example, accountants use a general ledger application, the billing department uses a billing and collections application, etc. Generally, business applications reside on a server that is accessed through the company’s network.
  • Technology services are applications that are made available to users to improve their productivity. Applications such as e-mail, Internet, and intranet services are included in this group.
  • Technology infrastructure includes the physical servers, networks, and communications capabilities of the company. Applications depend upon the infrastructure for users to gain access to them.

Downtime in any of the three groups of technology can have varying degrees of impact. To develop a “cost of downtime” concept, you don’t have to be precise. The quantified impacts are generally large enough that you just need to be in the ballpark to get your message across.

Degrees of impact
Here are examples of the impact of varying degrees of downtime:
  • A business application is down: If the general ledger application is down, you may assume then that the outage only affects people who need the general ledger to do their job. At first glance, this doesn’t seem like a big deal, but it becomes a very big deal when you consider that the outage also prevents the company from producing month-end financial reports. Ask any CEO or CFO who is preparing for a board of directors meeting without company financials. This example shows that the true cost in employee productivity may be minimal, but the actual cost impact to the company is big, especially when you consider the impact on the top two people in the company.
  • Technology services are affected: Consider a healthcare provider company that uses a legacy business application to register patients, record the medical services provided, and to bill and collect for those services. When this application is unavailable, it’s much more difficult for the clinic to register patients. Certainly, there will be backup processes, but the best manual process can’t be as productive as a solid automated process. Patients can still be treated, but the loss of employee productivity can be significant. When the system comes back up, all the information that was tracked manually must be input into the system. No one likes the extra work and there is a real cost in the recovery.
  • Productivity services are not available: We have all become accustomed to having e-mail, Internet, and intranet services available. Many of us have become so dependent on e-mail services that without it, we are almost cut off from the communities we need to communicate with. The phone and fax machines still work but have a cost impact in actual costs to do the job and in employee productivity.
  • Internal processes grind to a halt: Companies that have developed excellent intranet services can be impacted heavily when their intranet server crashes. More and more companies are eliminating the need to produce costly employee handbooks and other information products using paper as the choice of delivery. When the intranet goes down, the Human Resources department phones light up because people still need the information to do their jobs.
  • An infrastructure collapse: Infrastructure services can impact a single user due to a user setup change, an entire office due to telecom service disruption, or an entire enterprise disruption when a key server crashes.

Calculating the cost of downtime
So how do you go about calculating the cost of downtime? Start by listing the tangible technology components that have a significant impact on the company. These include the following:
  • Business applications: Key applications used by large numbers of employees or applications that are critical to day-to-day operation of the company
  • Technology services: E-mail, Internet and intranet, technology tools such as automated report distribution, and automated data interfaces that improve employee productivity
  • Technology infrastructure: Key servers, LANs, and WANs

The best was to present downtime cost is in terms of hourly cost to the company when the system is unavailable. You may want to break it down for a single user, for a typical remote office, a company department, or any other manner that helps your audience understand and appreciate the impact.

You can calculate the approximate costs by using Figure A.

Figure A
A form like this one will help you calculate the cost of downtime.


Line item 1: Direct employee cost includes the total hourly estimate for all employees who are impacted by the downtime. Calculate the total cost by adding the hourly cost estimate for employees who cannot work and use an “impact factor” for employees who are not entirely shut down. For example:

Users who cannot work: 10 users equals $200 (10 X $20/hr salary = $200)
Users who can perform some tasks: 100 users who are 20 percent affected equals $400 (100 X $20/hr X .20 = $400)

Total both figures and add $600 as line item 1.You should use similar calculations for the other line items.

Line item 2: Indirect costs include the nonproductive management time that results during downtime.

Line item 3: Employee recovery cost includes the time required to catch up once the system is restored. For example, if a system or application is down for an hour, employees that were affected might require 30 minutes to recover. If that’s the case, apply half an hour of the employee’s salary rate times the number of employees involved to calculate an estimated employee recovery cost. Also consider overtime, temporary help, and similar employee costs necessary for recovery.

Line item 4: Nonemployee expenses include costs of forms, phone, fax, and other expenses that would not be used if the system were operating as normal. Your best estimate, on this and other line items, is good enough.

Line item 5: Client service value is an estimated cost you perceive that causes your company a client service challenge. In some cases, you may be able to establish a true cost; in most, you will have to estimate.

Line item 6: IT recovery costs include the time and out-of-pocket expenses needed by the IT staff to restore the system.

Line item 7: Other costs are specified and grouped in this section.

You may be surprised at how expensive a single hour of downtime turns out to be. Going through this exercise will help you develop an appreciation for the costs. Now it is time to convey to your staff and others in the company the importance of maintaining systems that are reliable and easily upgraded without causing user downtime.

Figure B
A graphic illustration can help drive home the point: Downtime means money lost.


Figure B is an example of a picture that shows approximated downtime costs caused by various scenarios of a company’s environment. It’s a quick and graphic way to deliver your message.

Have you estimated your downtime costs?
Have you used calculations of downtime in the past? If so, in what ways were they helpful? Send us some mail or post a comment.

Mike Sisco is president of MDE Enterprises, an IT management training and consulting company based in Atlanta. Check out MDE’s IT Manager Development Series  for more of Mike’s advice for IT managers and CIOs.

1 comments
rdccosmo
rdccosmo

Another relevant issue to consider is how the software downtime affects the company's reputation for clients that depend on information offered by the software in question. 


How to estimate the bad press of unavailability of the Company's Web Site , for instance, during crucial moments, when the information published by would be more accessed?