How to calculate the cost of downtime

| By:
Brad Schow

Managed services providers (MSPs) are often challenged by prospects and clients about the necessity of services and how their investment may pay off. The best and most universal way for clients to really grasp the effects of downtime is to show them the money.

The deciding factor in business decisions, and ultimately the choice to partner with you for continuity services, often depends on the impact on the top or bottom line. As their trusted MSP, your responsibility includes minimizing your client’s service disruptions and unplanned downtime. To do this, you’ve got to help clients understand how exactly a downtime event can negatively influence their business financially.

Conversations about backup and disaster recovery (BDR) can be met with skepticism because a client hasn’t actually experienced downtime yet. It’s an out of sight, out of mind scenario, and they can’t fully fathom what an impact of data loss or an outage can create. Other business owners may assume that they can afford to be down for some period, without considering consequences like a loss in profitability or total business failure. The best way to convince decision-makers is to do the math.

Calculating the cost of downtime

How can you help your clients calculate the value of establishing and paying for a BDR plan? Use a formula that shows the total cost of downtime, which you can use anytime you’re selling business continuity services. 

Several factors contribute to the total cost of downtime:

Cost of Downtime (per hour) = Lost Revenue + Lost Productivity + Cost to Recover + Cost of Intangibles (i.e. reputation cost)

We’ll take a look at each factor in more detail.

Lost revenue

When your client’s business is down, they will not be able to generate revenue. To calculate lost revenue, follow these steps:

  • Identify the areas of the business that generate revenue.
  • Calculate how much revenue per hour is generated per area by taking the average revenue per week and dividing by 40 hours or the average revenue per month and dividing by 30 days. 
  • Consider how much revenue-generating areas rely on uptime and represent that number as a percentage. If your client is an e-commerce business, 100% of their business relies on uptime, whereas a brick and mortar shop may only be 20% reliant on uptime. 
  • Calculate how much revenue is lost per hour per area of business during downtime. Going back to our e-commerce business, if they generate $100/hour, they will lose $200 if their website is down for two hours. Our brick and mortar shop will lose $40 with two hours of downtime. 
  • Sum up the figures from each of the revenue-generating areas to get the total cost of downtime per hour for your client.

Once this baseline amount is established, it’s simple to understand the total amount of revenue lost during an IT crisis. 

Lost productivity

During downtime, employees may be forced to stop working or have to shift to non-revenue-incurring activities like getting systems back online. So, the cost of downtime actually increases because salaries, which are fixed costs, will be paid regardless of how much work gets done. Here’s how to calculate lost productivity:

  • Calculate the amount each of your employees earns per hour. 
  • What percentage of employee productivity relies on uptime? This will vary depending on the job role. At a doctor’s office, the doctors themselves will be fine during an outage, but the office assistants may only be able to work at 50% productivity since tasks like scheduling appointments are reliant on connectivity. 
  • Multiply each employee’s hourly wage by their utilization percentage. If the office assistants earn $10/hour and only work at 50% productivity during downtime, the business will lose $5 per hour of downtime for that employee. 
  • Repeat the previous step for each employee, then sum up all the figures to get the total cost of lost productivity.
Cost to recover

The cost of downtime is not the only number to consider. Disaster recovery and resuming normal business operations can be costly as well. This figure may be hard to estimate because it varies from situation to situation, but typical costs include:

  • Services needed to recover any lost data
  • Hardware that needs to be repaired or replaced
  • Cost of any lost data
  • Ongoing costs resulting from data loss

Identifying these costs during the business continuity planning phase can help minimize the costs clients will face in the event of a future IT crisis. 

Intangible costs

Unfortunately, when your reputation suffers, your business suffers. Even the slightest downtime can have a significant impact on your client’s business. How that downtime is handled can truly be the difference between recovering well or losing it all. 

It can be challenging to forecast intangible costs, but having a thorough understanding of the potential long-term impact due to downtime can help your clients see the real value of having a business continuity plan. 

Referring back to our previous example, if the brick and mortar shop experiences downtime, clients who purchase in person probably won’t even notice. But, if the e-commerce site goes offline, it can reflect very poorly on the company and may cause customers to jump ship. 

Calculating the final cost

Once you’ve calculated the figures for each factor, plug them into the main formula to get your total cost of downtime [Cost of Downtime (per hour) = Lost Revenue + Lost Productivity + Cost to Recover + Cost of Intangibles (i.e., reputation cost)]. 

If the resulting number far exceeds the cost of your BDR services, then you can use it to upsell existing clients or convince prospects to leverage your business continuity solution to protect themselves from data loss and downtime. A quarterly business review may be an excellent time to get this conversation going.