Calculating the Cost of Downtime for Data Centers and Businesses

Downtime is always going to cost a business money. How much depends on the extent and cause of downtime across an organization, and how well the process to recovery is planned and executed. Understanding the factors that affect the costs of downtime can help prioritize efforts of recovery, as well as illustrate the importance of properly maintaining systems.

Large data centers and fortune 500 companies know the importance of their data and network infrastructure when it comes to the dollars and cents revenue that is generated from these technologies. They also understand the risks and loss associated when these systems go down, which is why they calculate down to the hour how much money they stand to lose if and when their systems go down unexpectedly; and you should too.

 

Small and Medium Sized Businesses Can the Hardest Hit By Downtime

There are lessons and insights for small and medium-sized businesses to learn from calculating the costs associated with downtime of IT infrastructure, and consequently, the ROI of environmental monitoring systems cost savings in avoiding disasters. Small businesses can be the hardest hit by downtime because for many, they do not have the processes in place to prevent, or resolve issues which can extend the length and severity resulting in increased impacts on profits for a business.

Many times due to the initial costs, it is common for small and medium sized business to overlook some IT best practices which can minimize the risks and costs of unexpected downtime including building redundancies for power and internet, automating daily back-ups, off-site replication and monitoring the environmental conditions of their server rooms.

 

Does your company’s productivity and revenue rely on IT assets?

Even if you are only hosting your business email accounts, accounting software, CRM, website or customer database then the answer is, yes.

 

Have you considered what it would cost your business if your servers or network went down?

There is a simple formula for figuring this out, and it can help businesses realize their dependence on IT and the importance of properly maintaining and protecting these assets.

Cost of Downtime = Lost Revenue + Lost Productivity + Cost to recover + Cost of intangibles

 

Example Downtime Cost Calculation

To explain this equation let's start off with a simple example. Consider a business with 100% of its revenue generation from its online e-commerce store with $5 million in annual revenues. The chart below represents the potential lost sales for a 24-hour outage. In this example, the company with $5 million annual revenue would stand to lose around $13,699 per day of revenue.

Let's assume the company hosts its own e-commerce system and the outage was due to a temperature issue when an AC system failed and went unnoticed. The servers quickly began overheating until automatically shutting down which caused the company’s e-commerce site to go down and so no business could be transacted during that day.

In this scenario, most of the equipment was able to recover, but a server and disc drive had to be replaced costing approximately $2,000 to recover. The IT consultants who maintain the servers put in 8 hours to configure and install the devices, adding another $800 to the cost, for a total of $2,800 in equipment recovery related cost.

This company generates an average of $13,699 per day in revenue and for this example let’s assume 50% of the customers the others choose competitive suppliers and the others wait for the e-commerce system to return. The result is a daily loss of $13,699 in revenue with an overhanging additional $7,000 in lost revenue since they have lost the potential business to competitors. This means the total revenue loss related to this incident is $20,699. Add to that equipment related costs of $3,600 and you have a simple calculation for the total cost of downtime at $24,199 per day for this example company.

 

Example Calculation:

Lost Revenue ($20,699) + Cost to recover ($2,000+ 8 hours labour $800) + Cost of intangibles ($7,000 in lost customers) = Cost of Downtime Per Day ($30,499)

 

This is just a simple calculation to get you thinking of the costs your business may suffer as a result of unplanned downtime. This calculation also does not take into account the costs of lost productivity if workers are affected and unable to work which will be explained below.

Use the steps below to identify the variables of your business that could be affected and the costs should downtime occur.

Calculating the Variables of Downtime

Follow along with each section and fill out the corresponding variable for your business. At the end of the article, you will have a comprehensive “cost of downtime” calculation and summary based on your inputs.

1.) Lost Revenue

In today’s world, it is most likely that if IT assets are down, your business is down and you cannot generate revenue. Even if your primary revenue channels are not focused on the web due recent nature of business operations it is likely your peripheral channels such as accounting, sales and communication channels will be rendered inoperable as well.

Here are the steps to calculate lost revenue:

√ - Identify which areas of their business generate revenue.

Make a list of the areas of your business responsible for generating revenue and calculate the amount of revenue per hour for each of these areas. To get the hourly revenue generated from each area use one of the following equations:

Equation:

"Business Area Revenue Generated per day"  = ( Avg. revenue per week / 40 hours ) or  (Avg. revenue per month / 30 days

 

√ - Estimate how much each revenue-generating area relies on uptime and represent this number as a percentage.

In the above example, if your business only has an eCommerce website this means 100% of your business depends on uptime. If you have a brick-and-mortar store or have offline revenue streams perhaps only 10 percent of your business revenue is dependent on your uptime since people can still purchase goods from your store or sale calls even if your website is down.

To understand how much of your revenue channels rely on the uptime of your network infrastructure you will need to determine the amount each area requires the use of online resources.

  1. Is revenue generated solely online?
  2. Is revenue dependent on the use of email, databases, payment terminals or other online resources?

Using the above questions, estimate the percentage your business relies on uptime.

Example: A sales team for a wholesale distributor uses their website to generate leads, email to contact prospects and a customer database to processes orders. Although they are still able to make phone calls and meet appointments from previously scheduled work. This means their team relies on the uptime of their network for about 80% of generated revenue.

 

√ - Calculate the amount of revenue per hour that is lost during downtime for each business area.

For example, say your business is an eCommerce website that generates $100/hour. If that website is offline for two hours, you lose $200. However, let's say a brick-and-mortar shop which also generates $100/hour in revenue. If the brick-and-mortar store's website is down for two hours and only 10% of the business is affected, they only stand to lose $20.

Add the figures for these different revenue-generating areas to get the total cost of downtime per hour for your client's business.

Once that baseline is established it’s easy to figure out the amount of revenue lost during any length of outage or downtime event.

Equation:

Business Area Lost Revenue = ( Avg. Revenue Generated Per Day  X  % reliant on uptime )

2.) Lost Productivity

The cost of downtime also increases when clients or employees are unable to work or are required to do "non-revenue-related" tasks such as resolving the issue. This is because salaries are a fixed cost and are typically paid regardless of how much work staff actually completes. Here are the steps to calculate the cost of lost productivity:

√ - Estimate the percentage department relies on uptime.

Determine what percentage of your business’s departments productivity are reliant on uptime. This may vary across their team. Take for example, a manufacturing plant, if the servers were to go down any of their automated or CNC machines would not be able to work until the servers were back up so they are 100% reliant on uptime. Whereas any machines that require the operator to control manually or work done by hand would still be productive and thus would be 0% reliant on the uptime of servers. Their administration staff and sales team would still be able to make phone calls but would not be able to access their email, shared calendars or other resources which would make them about 80% reliant on the uptime of their servers to be productive.

√ - Calculate the average hourly wage of the employees in each department.

Once you have your estimated reliance on uptime for each department, you will now take the average hourly wage of the employees in that department and multiply by the reliance on uptime percentage. If the employees in the sales department earn on average $10/hour and they can only work at 20% percent when systems are down, your business loses $8 per employee for each hour of downtime while they are unable to work.

Add the costs in #3 for all employees to calculate the total hourly cost of lost productivity.

Equation:

Department Productivity Lost = {(# of employees x median wage per hr) x reliance on uptime %}

3.) Cost to Recover

Businesses often times underestimate the costs associated with recovering from a downtime disaster and resuming normal business operations. This is because it can be hard to estimate as it usually depends on the extent of the outage and/or any data that was lost, but costs can typically be summed into these categories:

√ - Services needed to recover lost data

Services to recover can include your employees working to troubleshoot the issue and get systems back up and running, as well as any outside contractors such as an MSP or third-party IT company who is contracted to help as well.

To understand these costs you will want to calculate the average hourly wage of employees who are working to solve the issue and any additional services needed as well, and then multiply by the number of hours to recover.

Equation:

Services Needed to Recover = {(# of employees x median wage) x hrs to recover + $ of services to recover }

 

√ - Physical tools/devices that may need repairs or replacements

You will also want to calculate the costs of any tools, software or hardware that needs to be purchased to solve the issue or replace that have failed. Along with the purchase price, you will also need to calculate the costs for employees who are doing the repairs or replacements.

Equation:

Cost of Tools, Repairs & Replacements = {(# of employees x median wage) x hrs to recover + $ of tools/services to recover } >

 

√ - Cost of lost data

Determining the cost of lost data will include calculating the amount of time and money spent on creating the data in the first place if the data is irreversibly destroyed in the incident. As the data is no longer available and money has been spent in generating it, it is now considered a loss.

Equation:

Cost of lost data = {( % data lost x median hrs to complete) x profit from data}

 

√ - Ongoing costs as a result of the data loss

If data is lost during a downtime incident, there can be residual losses that extend even after it has been resolved. Costs associated with replacing or reproducing data should be calculated in order to understand the full impact. Employee wage and hours to reproduce the data are costs that will need to be calculated, as well as any profit that was made from the use of this data is now considered a loss.

Equation:

Ongoing Costs of Lost Data = {( data lost x hourly profit from data) x (# of employees x median wage per hour) x hrs to recover data

 

Identifying these costs during your business continuity planning period helps minimize the recovery costs clients may face in a disaster scenario down the line.

 

4.) Intangible Costs

If customers are directly affected by the downtime, it can cause damage to a businesses reputation. The slightest downtime can potentially cast an insurmountable shadow over your business. The speed of recovery and how downtime is handled with customers can be the difference between recovering and going under. These intangible costs can be difficult to predict and will depend on how the downtime affects your customers. Having at least some understanding that downtime can have a long-term impact on future sales and customer retention can help business owners see the real value of being genuinely prepared for such an event.

Referring back to our previous example, if your brick-and-mortar business server goes down, clients who purchase from your establishment likely won't notice website downtime as terminal POS is separate from your on-premise servers and online payment processing. However, if your eCommerce site goes offline, it reflects very poorly on the brand and customers will be left bewildered and search for competitors.

Equation:

(daily sales / % of total business reliant on uptime) x (% lost potential business to competitors)

5.) Calculating the Final Cost of Downtime

After determining the costs for each section, you can now add them into the main formula below to calculate your total cost of downtime. 

Equation:

Cost of Downtime = Lost Revenue + Lost Productivity + Cost to recover + Cost of intangibles

If the resulting number far exceeds the costs of investing in disaster recovery, backup solutions, redundancy planning, and systems that can actually prevent downtime such as environmental monitoring systems, then you should be able to use these calculations to convince stakeholders about the ROI of these systems in order to protect your business from downtime and the associated risks of data loss, loss of reputation, and lost revenue.

Calculating the ROI of Environmental Monitoring

 

98% of Enviromon customers come to us after they have experienced these kinds of issues and want to prevent from happening again. In many cases, it may be due to a failed AC power supply or other challenges of working in older buildings with HVAC systems that are not designed for the additional cooling load of a server room, or potentially if their server room is located in an unventilated storage closet. Regardless of the situation, temperature sensors can help prevent the risks of overheated servers by automatically alerting staff to the issues immediately when it happens.

Additionally regarding the RoI of Environmental Monitoring and being able to resolve temperature and environmental issues before they become more serious is that the majority of IT equipment OEMs and customers such as large telecoms have noted although not all excessive temperature issues cause immediate failure of hardware there is increasing evidence that there is a higher occurrence than average for hardware to incur intermittent performance issues or failures are seen over the preceding months.

These later issues are additional RoI inputs for the case of environmental monitoring, particularly for small and medium-sized business that, unlike large Data Centers and fortune 500 companies are not able to change out their servers or other devices on two or three years cycles. Often the IT infrastructure at many SMBs can be 5-10 years old meaning there is potential that these systems have been stressed several times during their service life making them even more prone to intermittent issues or failure.

DCIM systems may be difficult to specify, justify the cost or calculate the ROI. They often require extensive installation, maintenance, and training resources and continuous analysis of the data to make them useful, meaning staff resources will need to have time dedicated to these tasks.

Simple, low-cost environmental monitoring devices can are easy to install and setup, and perform the simple task of letting their users know when there is a problem coming or one that has occurred. Small and MidSized Businesses will be well served by these devices.

Contact us at Enviromon to discuss your server room situation and we will be able to provide you with the best recommendations to monitor your server room and prevent avoidable disasters like these.

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