How to Calculate the Cost of Downtime and use it to fund Your DR Project
- There are many different ways to calculate the cost of downtime
- We present three calculators, and a shorthand number you can use at your discretion
- We also offer some advice on how to use the information to gain approval for the cost of a Disaster Recovery project
In 2014, Gartner published the results of an analysis into the cost of downtime. Based on industry surveys (presumably of Gartner clients and/or similar size businesses), they estimated cost for the average (large) firm of USD$5,600 per minute.
The Ponemon Institute later updated the figure to $9,000 per minute. But nobody has really driven the conversation since 2016 with a fresh comprehensive study.
In some ways, it doesn’t matter. The fact is there is a cost and even though it differs between companies, it’s always high. Using an average based on data from the largest of companies doesn’t help you convince your Managing Director or Board of the need for your own investment in Backup and Disaster Recovery (DR) technology.
So you should use a calculator and your own company’s data to arrive at something meaningful to your team.
Downtime Calculation Methods
Rather than create our own version of some well-worn metrics, we have reviewed some key peers’ formulas and present them below. In the last part of the article, we show you how to win investment from key decision-makers.
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 rough estimate.
Decide on the productivity impact factor of the downtime event. (Computer One note: 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 80 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 % x C x H
- E = number of employees affected
- % = 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 figures to win the appropriate investment from your key decision-makers.
In simple terms, the likelihood of a disaster event and its potential cost have to outweigh the financial investment and the time required to create the backup and DR plan.
But getting approval for a substantial investment is likely to be a bit more difficult than that. It isn’t always enough to have accurate numbers – you may need to adopt some sales skills.
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 idea catchers 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