How to Calculate the Cost of Downtime and use it to fund Your DR Project
- The cost of downtime can be calculated in several ways.
- We provide three calculators, as well as a rule-of-thumb type number that you can use at your discretion.
- We also give some pointers for how to apply the data in order to get a Disaster Recovery project approved.
In 2014, Gartner conducted a study on the cost of downtime to determine how much it costs businesses. According to industry polls (presumably from Gartner clients and/or similar-sized corporations), they estimated that the average (large) company would pay USD$5,600 per minute.
The Ponemon Institute later calculated the figure at $9,000 per minute. But nobody has really driven the conversation since their article in 2016 by producing a fresh comprehensive study.
To some degree, it doesn’t matter. The fact is that there is a cost, regardless of the business, and even though it varies by company, it is always expensive. Using an average derived from data from the most important firms does not assist you in winning over your Managing Director or Board on the need for your own Backup and Disaster Recovery (DR) system.
So, in order to provide something meaningful to your team, you should use a calculator and your own company data.
Downtime Calculation Methods
Instead of coming up with our own brand of some well-known metrics, we’ve gone through several key peers’ methods and compiled them here. We’ll show you how to gain the attention of important decision makers in the last section of the paper.
The Hard Cost Method
Here’s an excerpt from CIO.com
To calculate the productivity impact financial number is a simple process:
Determine the average hourly salary of the impacted employees. You can get this easily from human resources or a senior manager in the operations side of the business. All you need is a credible estimate that won’t be too far from the fully validated figure.
Decide on the productivity impact factor of the downtime event. (e.g. If your primary internet link is lost and you don’t have a backup, what would that mean for all your departments?) This can be as low as 10 percent to as high as 100 percent depending upon what the outage is and the nature of the work of the impacted employees.
Calculate the “Productivity Cost Impact” or you can call it the “Cost of Downtime.” To do this: Cost of Downtime = (Impacted Employees) X (Productivity Factor %) X (Average hourly salary)
So in a team with 100 professional staff, in a company with a full cloud-model, the calculation is likely to look like this:
$57.97 (average hourly salary) x 90% (assumed level of productivity impact) x 100 (number of affected employees) = $5,217.30 per hour
But that’s just the hard cost to the business. What about the opportunity cost?
The Total Cost Method
If you want a bit more detail to satisfy your decision-makers, use this formula to add both your hard costs (money you will actually lose) to your Revenue Cost (the lost money you can’t charge to customers during the downtime event):
Productivity cost = E x I% x C x H
- E = number of employees affected
- I% = percentage they are affected (eg. Can they still perform 50% of their job even after application access is interrupted?)
- C = average cost of employees per hour
- H = number of downtime hours
Revenue loss = (GR/TH) x I x H
- GR = gross annual revenue
- TH = total annual business hours (for a professional services company we recommend using 230 x 8 = 1,840 which takes into account non-working hours from weekends, public holidays and annual leave, plus an average of 3 personal leave days)
- % = percentage impact (this may be the same number as in the productivity cost calculation or it may differ depending on how the business’ ability to earn revenue is affected by an outage)
- H = hours of downtime
Atlassian, citing a report from Carbonite, which in turn took some data from an IDC report, likes to keep it simple.
Use $427 per minute for a small company, and $9,000 for a medium to large company.
But they don’t go into too much detail on what a small, medium and large company looks like, or the differences between industries, online trading etc. So take their figures with a grain of salt.
Use our Excel calculator
If you just want to plug in some numbers and get the answer then we have built a simple calculator for you to use.
It produces the Hard Cost and Revenue Cost as separate figures and then combines them at the end.
Be our guest and rebrand it as your own if you like. We haven’t locked anything down.
You can download it here.
How to use the figure to win the appropriate investment in Backup and DR
Regardless of how you calculated the cost of your downtime, here’s how to use the data to persuade your key decision-makers to invest in your project.
When it comes to data protection, the cost of developing and deploying a disaster recovery and business continuity plan typically outweigh the potential cost of an event and the probablity that it will occur in the near to medium term.
Obtaining permission for a significant expenditure, however, may be more difficult than for a small one. It’s not always enough to have good figures – you may need to learn how to sell yourself.
Our friend Babette Bensousan, of Mindshifts, has some timely advice to offer on convincing senior leaders of the need for investment.
“A couple of academics from Stanford and the University of California looked at how ideas are successfully sold in, of all places, Hollywood. Selling a script may not be all that close to selling your idea for a new product or marketing campaign, but the lessons ring true no matter what kind of idea you’re peddling.
Not surprisingly, the first discovery was that the more passionate the person pitching the idea, the more effective they were.
Secondly, the better the pitcher was at drawing in the person on the other side of the table, the more likely they would succeed.
Indeed, the most successful pitchers were those who convinced the decision-makers that they had something to do with the crafting or improving the idea itself.
“A lot of naive pitchers we talked to assumed what was important was for them to be passionate and to get their concept across clearly,” says Kramer, a professor of organizational behaviour at Stanford. “That’s important, to be on fire about an idea. But the other thing was to what extent the catcher was engaged and also felt creative.”
In fact, adds Kramer, the person hearing the idea “has to feel like they are drawn in and contributing.” The more you can make the potential buyer of the idea believe they came up with or helped improve the concept the better.”
How does that apply to you?
For your DR pitch, don’t just present the facts and talk about Recovery Time Objectives and Recovery Point Objectives. Without grounding them in the reality of what your organisation is and does, those numbers won’t capture your audience.
Bring those concepts to life by talking about what benefits those two numbers will bring.
Paint the picture of how the revenue of the business, the brand and the personal brands of decision-makers can be affected by outages that your plan will keep at bay.
Demonstrate how your plan protects the core of the business to keep it productive in an outage event, in turn helping the entire organisation.
Then you’ll be in the best position to get your funding.
There are many different ways to calculate downtime: as Hard Costs, Opportunity Costs, with a rule-of-thumb figure or by using our Excel calculator.
Create a range of scenarios, and their respective costs. You’re not going to come up against just one kind of outage and your DR plan needs to cover all important eventualities.
When you have established your costs, spend some time thinking about how to help other decision-makers see the importance of DR as strongly as you do.
Final tip: Asking questions is always a more powerful way of gaining commitment than telling.
If you want to ask us some questions about Disaster Recovery