You may have heard that even a minute of downtime can result in the loss of thousands of dollars for businesses. Still, that sounds impossible, right? Let’s have a look at some examples:
The aforementioned examples relate to the big enterprises that have been on the market for years, have already established trusting relationships with their customers, and have high revenues to mitigate the consequences of downtime. Any mistake is measured in monetary loss, whether that means hundreds of thousands or millions of dollars. Yet how much would such a failure cost for a startup or a small business? Or would it only be measured by financial expenses? In any case, one mistake could definitely force a business to close.
Before we get into the reasons for downtime and its average cost to a business, it will be useful to define what downtime cost actually means and what it affects. Downtime cost is defined as any profit that a company loses when its equipment or network stops functioning.
The cost of downtime implies not only direct financial loss but can have an impact on your company in at least the other 4 ways.
Reputation
One of the most serious and long-term effects of downtime is damage to your company’s reputation. If clients face continuous server outages that cause them when using the company’s products or services, they will leave negative reviews of that company and will not use its services again. Word of mouth and social media channels will spread negativity about your brand like wildfire, pushing existing and potential clients to your competitors.
Productivity
These days, nearly every business provides its customers with online services: people can exchange messages via chatbots, place orders, and then receive an email about its delivery. While all these online processes still require human control, employees may fall out of the workflow if server downtime takes place. On the other hand, an unplanned outage can terminate work for the whole manufacturing company at once and require extra time to get everything up and running again.
Opportunities
Lost opportunities mean lost customers. IT downtime will prevent a company from delivering its services. It was proven that 47% of online customers would leave a website unless it was loaded within 2 seconds. In the case of service downtime, customers are unlikely to wait for your business to solve the issue, but will instead find a better offer from your competitors.
Data
Data loss is a nightmare for all companies. Obviously, server downtime comes with the potential risk of data fraud, although backing your data up may save most of the information. Even the best service provider will not be able to guarantee 100% that an unexpected outage will have no consequences. In turn, customers who aren’t able to access their accounts will panic and eventually lose trust to your product.
The cost of downtime depends on the industry, business revenue, duration of the outage, and even the time of the day. If we compare a private clinic and a bank that bases its activity on high-level transactions, clearly, the latter would have higher recovery and downtime costs. Also, the loss would be more significant if downtime were to happen during the company’s peak hours.
The following factors that are often taken into account when most businesses calculate their cost of downtime:
Business industry
Industry vertical refers to the ranking of the industries that involve large, high risk IT budgets as a percentage of revenue by sector. The industries with higher risk are banking and finance, government, business and professional services, insurance, technology and telecommunication, and manufacturing. Due to the high risk factor, these kinds of businesses can spend up to $5 million per hour of downtime on average. Other industries such as education, construction, retail, and healthcare have lower IT downtime risks; as a result, their losses won’t be as detrimental.
Business size
Business size is one of the key factors that play a significant role in the downtime cost. There is a huge difference between an organization with 10,000 employees or a medium-sized enterprise with 500 team members. In the case of a system outage, the business owner would have to pay both for regular and overtime hours for employees to be able to catch up with the workflow. Just imagine that large organizations can lose up to $60 million per year if they face a couple of system outages.
Business model
The last factor which influences the calculation of downtime cost is the business model. The more a company relies on online services, the more serious the losses. For example, an e-commerce platform whose efficiency depends only on the server, and which makes all its revenue from online sales, has a higher monetary value of downtime than a physical shop that people can visit and make cash transactions at. Once, Amazon revealed that its downtime cost might reach $13 million per hour.
Using the IT downtime formula below, you can calculate your business’s downtime cost.
Cost of Downtime (per hour) = Lost Revenue + Lost Productivity + Recovery Costs + Intangible Costs
Lost Revenue = Revenue/hr x Downtime(hrs) x Uptime(%)
In this formula, the lost revenue means the amount of money your business earns per hour. Even if your business functions 40 working hours per week, uptime – the time when you depend on online operations – can be lower unless you are an e-commerce store. For example, if your revenue is $2,000 per hour, and your system goes down for 3 hours, and you depend on the Internet for 40% (uptime), then your downtime loss would estimate $2,400 per hour. If you are an e-commerce business owner, then you can consider 100% of your revenue to be dependent on uptime.
Lost Productivity = Employee Salary/hr x Utilization(%) x Number of employees (same Utilization %)
The next step is to calculate lost productivity. When your employees can’t do their jobs due to server downtime, you still need to pay them their fixed hourly rates. At the same time, uptime or utilization percentage is the percentage of time your employees rely on online operations. Like in the previous example with the e-commerce store, let’s assume that you have 30 employees who work 8 hours per day, and you pay them $12 per hour. The percentage of Internet utilization is 100. Consequently, your lost productivity cost would be equal to $360 per hour.
Regarding recovery costs, they can be unlimited and depend on your business. Here you can include repair services, lost data recovery, employees’ overtime cost, and other expenses related to the process of getting your business back into its regular workflow.
Finally, intangible costs are not directly materialistic, but long-term. Here you should think about your company’s reputation, which could be severely damaged when your customers experience the difficulties of logging in or completing a transaction, etc.
Therefore, the final cost of downtime will be the aggregate of lost revenue, lost productivity, recovery costs, and intangible costs.
In 2020, the ITIC study showed that since 2016 the average cost of downtime that lasts 1 hour has risen by 30%. In summary, 1,000 companies answered the poll questions, and the results were as follows:
More than 30% of the enterprises claimed that they spend from $1 to 5 million on 1 hour of downtime. Meanwhile, over $300,000 is the value of 1 hour of downtime for nearly 80% of organizations. Finally, 98% reported that 1 hour of downtime costs them almost $100,000.
The estimated total cost per minute of an unplanned downtime
If you have never experienced downtime but are curious about how much the average cost of downtime may be for your business, you can use the estimated cost defined by businesses that have used the downtime calculator.
Downtime cost = Hours of downtime x Cost-per-hour
To find out the estimated cost of downtime for your business, we suggest that you take $25,620 as a cost-per-hour for a small business and $540,000 for medium and large enterprises. Therefore, in the case of 2-hour downtime, its estimated cost would be $51,240 for small companies and more than $1 million for large ones.
These are just approximate figures, and to understand the whole situation you will need to take into account the previously mentioned factors such as business industry, business size, business model, as well as productivity, data, and reputation losses.
Even considering the smallest possible loss of $50,000 per hour, you can assume that it can be a verdict for small-size enterprises and startups. Unless you, as a business owner, can afford such an expense, you should think about what you can do to avoid downtime at all costs.
In some situations, it may be too late to prevent downtime; so here are some tips on how you can minimize your downtime costs.
1. Make a recovery plan
When downtime occurs, you should have a previously approved plan with the next steps you need to take. The so-called incident response plan is a set of instructions for your team to face and recover from any unplanned or planned network incidents.
2. Eliminate the cause
While solving the real cause of the downtime, you should bear in mind its consequences. You should remove all points of failure from your processes to reduce downtime costs and mitigate its consequences.
3. Prioritize communication
Customer service is extremely important during downtime crises. So you should find a way to warn your customers about the issue, why it’s happening, and how long your team needs to solve it. By keeping your customers in the loop, you will minimize reputation loss.
4. Ask for help from third parties
If you see that it is not within your power to address the cause of your service downtime, do not hesitate to ask for assistance from third parties. At first glance, it may seem more expensive, but you might be pleasantly surprised.
5. Work on your mistakes
Once you resolve the problem and get your business back to its regular process, it is time to think about what you can do to prevent it from happening again. There is no way to guarantee that your business will never ever experience downtime, but next time you should and can be more prepared.
Before you start looking for ways to prevent downtime, first, you should understand why it happens. There are 5 main reasons why businesses experience IT downtime.
1. Human error
According to recent statistics, almost 50% of IT downtime happens because of human errors. It comes as no surprise as human errors are unavoidable, but you can minimize their frequency by setting instructions and standards that your employees should follow. Continuous training and constant feedback will aid your workers in decreasing the number of possible mistakes and their severity.
2. Internet and power outages
Unlike human errors, you cannot control the internet or power outages, as they are mostly unplanned. However, you and your team can prepare for them and reduce the downtime costs. Some useful pieces of advice that many medium-size and large enterprises have used include; getting a backup generator, switching to off-site or cloud-based server hosting, and getting a backup Internet connection. Indeed, those can be quite costly for small companies and startups, but they can drastically reduce costs associated with internet or power outages.
3. Hardware failure
As a rule, when you are eager to start your business, you have a limited budget for IT equipment. However, hardware failure ranks third place among the reasons why downtime happens. This can be avoided if you duplicate your hardware and have an excess of it. Moreover, you should maintain and update it.
4. Cybersecurity risk
It is important to mention that cybersecurity breaches have increased in the last few years. Cybersecurity threats are a real risk for your business these days. To protect your data and network from cyber attacks, you can use multi-factor authentication, fraud detection software, and file encryption.
5. Server instability
Server instability may often lead to service downtime. Even when your network works well, you may experience issues with your server. That is likely to happen when the latest technology is used on old hardware. In addition, there is no hosting company that can guarantee you 100% uptime for your business, but cloud, virtualization, and server technology will lower the chances and the cost of network downtime.
According to the results of the poll carried out by Forrester, more than half of businesses experience unplanned downtime every one or two months.
The point is that you cannot really stop server downtime at once but rather do all the precautions to avoid this happen. If downtime happens, find out the reason and try to solve it as quickly as possible. Redundancy and maintenance practices should be implemented to decrease the possibilities of server downtime.
What you can do to prevent it:
Most businesses think only of monetary loss when it comes to IT downtime; however, customers’ bad experience and the company’s ruined reputation are the two things that businesses should worry about first. Once your reputation is tarnished it can be difficult to earn back your customers’ trust and make up for the damage to the perceived value of your services. Investing in precautions to prevent downtime will cost less than trying to fix the damage associated with downtime.
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