How to Calculate the Cost of Downtime for Your Clients
How can you help your clients truly understand how downtime hurts their business? For companies today, there is only one universal standard by which they will “get it.” That standard is money. The impact on the top and/or bottom line is often the deciding factor in any business decision, including the decision to purchase your business continuity services. As your clients’ trusted partner and managed IT services provider (MSP), you’re responsible for minimizing service disruptions and unplanned downtime. In order to do this, you first have to help your clients understand exactly what a downtime event can cost their business.
Conversations around backup and disaster recovery (BDR) are often met with skepticism because downtime is usually something a client doesn’t fully appreciate until they’ve experienced data loss or an outage. To deflect discussions about BDR and business continuity planning, many business owners claim that they can afford to be down for an extended period, neglecting to consider consequences like reduced profitability and total business failure. Typically, this is just an assumption and those who object haven’t analyzed the business impact of an IT crisis. The best way to convince these decision makers is to do the math.
Calculating the Cost of Downtime
So what kind of formula will help your clients understand the value of establishing and paying for a BDR plan? The total cost of downtime.Calculate this figure when selling your 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)
Let’s examine each of these elements more closely.
This is pretty straightforward. If your client’s business is down, they cannot generate revenue. Follow these steps to calculate lost revenue:
- Identify which areas of their business generate revenue.
- Calculate the amount of revenue per hour each of these areas generates (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. For example, if your client is purely an eCommerce website, 100 percent of their business depends on uptime. If they’re a floral shop, however, perhaps only 10 percent of their business is uptime-dependent, since people can still purchase goods from their store even if their website is down.
- Calculate the amount of revenue per hour that is lost during downtime for each business area. For example, say your client’s eCommerce website generates $100/hour. If that website is offline for two hours, they lose $200. However, let’s say your flower shop client also generates $100/hour in revenue. If their website is down for two hours, only 10 percent of their business is affected, so they only 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 an outage or downtime event.
The cost of downtime also increases when your clients’ employees are unable to work or are forced to perform non revenue-related activities such as getting systems back online. This is because salaries are a fixed cost and will be paid regardless of how much work staff completes. To calculate the cost of lost productivity, follow these steps:
- Calculate the amount each employee earns per hour.
- Determine what percentage of their employees’ productivity is reliant on uptime. This may vary across their team. If your client is a dental office, the actual dentists may not be affected if a server goes down, but the receptionist may only be able to work at 50 percent capacity – answering the phones, but being unable to use the computer to access shared calendars and book appointments.
- Multiply each employee’s hourly salary by their utilization percentage. If the receptionist from the dentist’s office earns $10/hour and they can only work at 50 percent when systems are down, your client loses $5/hour of downtime for that employee.
- Add the costs in #3 for all employees to calculate total hourly cost of lost productivity.
Cost to recover
Often, clients don’t think of the costs associated with disaster recovery and resuming normal business operations. This may be hard to estimate as it usually depends on the extent of the outage and/or data loss, but typical costs include:
- Services needed to recover lost data
- Physical tools/devices that may need repairs or replacements
- Cost of lost data
- Ongoing costs as a result of the data loss
Identifying these costs during your business continuity planning period helps minimize the recovery costs clients may face in a disaster scenario down the line.
Any damage to reputation or brand results in dollars lost. The slightest downtime can cast an insurmountable shadow over your client’s business—and how that downtime is handled can be the difference between recovering and going under. Intangible costs can be difficult to forecast, but having a thorough understanding of the potential 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 the florist’s server goes down, clients who purchase flowers from their establishment likely won’t notice website downtime. However, if an eCommerce site goes offline, it reflects very poorly on the brand. Customers may decide to shop elsewhere.
Calculating the final cost
Once you have determined each cost, plug them into the main formula above to calculate the total cost of downtime. And if you don’t fancy yourself a mathematician, use this downtime cost calculator in your BDR sales conversations. 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 in order to protect themselves from data loss and downtime.