What is the True Cost of Downtime for SMBs ?

Mar 12, 2014 Posted by

According to a recent survey from the Ponemon institute, the average cost of per-minute downtime is $7,900 – up from $5,600 per minute in 2010. While potentially alarming, these figures could easily be dismissed as relevant only to a handful of the largest enterprises.

For an e-commerce giant such as Amazon the numbers are even higher, with a reported loss of up to $66,240 for every minute of service downtime. While a minute of downtime stands to cost smaller enterprises considerably less, the relative cost is still significant. Surprisingly, the effort to measure (and manage) this cost has only recently become a priority. As a result, it’s easy to make the mistake of dismissing the cost of downtime without attempting to factor it into the bottom line.

So how do you calculate downtime if you’re a small business? Not surprisingly, the math doesn’t change. But don’t let the numbers fool you. Even a niche retailer with relatively modest revenue feels the sting of downtime. First, let’s look at a bucket list of factors that contribute to cost of downtime:

Revenue Lost
This one might seem trivial. Assuming revenue is generated online, simply divide yearly sales by 525,600 (60 min x 24 hours x 365 days) for average per-minute cost of downtime. So the formula might look something like this:

loss of revenue equals to average revenue per minute times downtime

 

 

Where t denotes the number of minutes of downtime

Cost of lost employee productivity
Cost of time affected employees cannot operate as usual

Cost of productivity loss equals to hourly wage times number of affected employees times downtime

 

Where W denotes average hourly wage per employee and E denotes the number of employees affected by downtime

Cost of IT Recovery
Cost of time IT staff is busy getting your system back up and running

cost of recovery equals to hourly wage times number of IT staff times time IT spent on recovery

Where EIT  denotes the number of employees engaged in IT operations and t’ denotes the time required to fix all affected systems and return to business as usual

Projected loss of revenue due to customer loyalty
For simplicity’s sake, let’s assume the business in question is not very high profile, so projected lost revenue is calculated as a percentage of potential repeat sales.

projected loss of revenue equals to direct loss times repeat sales rate

 

Where  r denotes the average repeat sales rate.

Projected loss of revenue due to damage to reputation
Lost sales from customers researching the best deal or referrals

damage to reputation equals direct loss times referral rate

Where  r’ denotes the percentage of sales referred by social media and shopping comparison sites.

So a formula for total cost of downtime (TCoDT) might look something like this:

Total Cost of Downtime

 

Where Rloss, Cprod, Crec, Ploss and Prev respectively denote lost revenue, cost of productivity, cost of IT recovery, projected loss of repeat sales, and projected loss due to damage to reputation. As an example, let’s examine a small online retail operation with $10 million in sales and 20 employees on the payroll. That’s an hourly cost of $1141.55 or just over $19 per minute as a direct loss of revenue.

Let’s assume you’re running a reasonably streamlined operation, and you’re down for no more than nine hours per year (just shy of three nines). That means all affected employees (suppose 50%) weren’t able to operate normally for at least that period of time. If we assume an average hourly wage of $52 that’s still a cost of $3,744 in lost productivity. It stands to reason the IT team would spend just a little bit longer figuring out what went wrong and then preventing it from happening again. Consider it takes your geniuses 45 hours to patch everything up. Even if you dedicate just one employee to this task, that’s an extra $2,340  tied up in IT recovery cost. Finally, not only did the customers you lost go with one of your competitors never to return – new customers are less likely to buy as a result of referrals or recommendations on comparison shopping sites. So let’s add a loss of $3,078  to account for an extra 30% projected loss in repeat sales and $2,054.79 for a 20% loss in referrals. It’s not a pretty picture, but let’s add it up anyway (remember, this is only a blog post):

Loss of revenue  $10,273.95
Cost of productivity  $ 4,680
Cost of IT recovery  $ 2,340
Loss of repeat sales  $ 3,595.88
Loss of referred sales  $ 2,054.79
Total cost of downtime . . .  $22,944.62

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It quickly becomes clear why there’s a significant gap in the way enterprises and small businesses approach downtime – from measurement down to response and recovery procedures. According to our recent cloud disaster recovery survey, 37% of organization estimate a day of downtime costs more than $10,000, which coincides with 38% of respondents reporting over $10 million in annual revenue. So while these figures are significantly lower than the cost of downtime reported for enterprises, it’s also clear that even small businesses who rely on the cloud must approach the challenge of uptime just as seriously. As a result, measurement techniques, emergency response practices, and recovery procedures are all being redefined to account for economies of scale.

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