What will that “hour” cost your company?
The task of a kicker in American Football is quite unenviable – make 10, 40+ yard field goals in a row and nobody comes screaming down the field to hug you or carry on their shoulders, but should you miss that one game tying 48-yarder, your very value to humankind is questioned. Those of us old enough to remember Scott Norwood from the 1991 Buffalo Bills are shaking their heads in agreement.
Managing mission critical applications is no different. 3 straight months of no-disruption brings you no accolades, you are not stopped in the hallways by staff or executives complementing you. However, within minutes of Exchange server going down, your phone is ringing off the hook. Walk to the cafeteria and you are quickly surrounded by new found friends, they all know your name, what you do AND that their emails are not working. Such is the impact of downtime!
So what is downtime and when is it downtime?
Downtime as defined by ITIL is, “The time when a Configuration Item or IT Service is not available during its Agreed Service Time. The Availability of an IT Service is often calculated from Agreed Service Time and Downtime.”
So any disruption occurring outside of the “agreed service time” it is really NOT causing downtime unless of course the resolution takes you into the Agreed Service Time window. Keep this in mind as you quantify your downtime costs. Since downtime is really disruption when it matters, downtime is serious business.
Why is downtime such a big deal?
Because it compromises your employee productivity
Because it makes you lose transactions & customers
Because it makes you to pay SLA based penalties
Because it ruins your company’s reputation
According to a survey conducted by Forrester Research the hourly cost of downtime for a typical company can range from $10,000 to $1 million! Below I discuss some of the ways cost of downtime is usually calculated. The intent is to help you quantify your downtime and let you put together a business case to improve/enhance your service management capabilities.
1. Because it compromises your employee productivity
As your systems experience disruption and downtime, your employee productivity suffers, depending upon the nature of the application the magnitude of the impact may vary, but there will be an impact.
Cost of Labor as your employees sit idle
This is probably the most straightforward calculation, while the cost of labor is usually known, an estimate of the impact to productivity does need to be made.
Labor Costs = N x I x D x C
N = Number of people affected
I = Percentage of productivity impacted
D = Duration of the outage during the agreed service time
C = Cost/employee/hour (average fully loaded)
Let’s assume a B2B company BigGigs with 1,000 employees, experiences an outage that disrupts an application, SellWell. SellWell, a sales application is used by all 300 company representatives to take incoming orders from large customers. Without SellWell, they can only do about 25% of their work. The average cost/hour for these employees is $45.
The outage lasts for 2 hours.
Effect of Downtime from Labor Costs
N = 300 (only the company representatives are impacted)
I = 75%
D = 2 hours
C = $45
Total Labor Cost = 300*75%*2*45 = $20,250 or $10,125/hour of downtime
2. Because it makes you lose revenue & customers
This can be tricky, while revenue is produced within specific hours, not having service available at a certain time does not necessarily negate the possibility of that revenue being realized. Said another way, if your online business is down at 8:00 p.m. on Monday, it does not necessarily mean the same customers may not come back on Tuesday and complete their transactions. But undoubtedly there will be some lost opportunities, so you must account for that.
A = Annual Revenue
T = Total business hours/year
RL = Percentage of revenue lost (customer goes elsewhere and buys)
D = Duration of the outage during the agreed service time
Lost Revenue = A/T*RL*D
Let’s assume BigGigs has $300 million in annual revenue. While their larger customers call in to their reps, the smaller customers conduct business using the web interface of the SellWell application. The smaller customers account for $150 million in revenue. Most of the business is conducted Monday through Friday, between the hours of 8:30 a.m. and 8:30 p.m. Historically, if the web portal is not available, 20% of the customers, looking to make a purchase, have gone to a competitor and completed the transaction there.
A = $150 million
T = 12(hrs/day)*5(days/week)*52(weeks/year) = 3,120 hours
RL = 20%
D = 2 hours
Lost Revenue due to Downtime = 150,000,000/3,120*20%*52*2 = $19,231 or ~ $9,615/hr.
We have all done this at some point – we went to our trusted vendor, saw their portal was down, went elsewhere and made the purchase. And if the experience was good, we take our loyalties and our wallet to this new vendor. As discussed above, there will be a certain number of customers who will go to a competitor and make a purchase and while most will come back to you there will be some that won’t. You would have permanently lost a customer and the lifetime stream of revenue that he would have generated for you!
Lifetime stream of revenue simply means the discounted cash flows of all the future purchases (also known as the Net Present Value) this customer would have made with you and that basically is the Lifetime value of the customer to your company.
L = Lifetime value of your customer
PL = Customers that you permanently lost (they went elsewhere and will not come back)
TC= Total Number of Customers
Lost Revenue = L*PL*TC
Let’s assume BigGigs has 30,000 small customers and they lose .005% each time they suffer an outage (1.5 customers for every 1 hour of downtime). The average annual spend per customer is $5,000 and a typical customer stays with BigGigs for 5 years.
L= $25,000 ($5,000 per year spend and 5 year typical lifecycle, no cash flow discounting applied for simplicity)
PL = .005%
Lost Revenue = $25,000*.005%*30,000 = $37,500
Just adding these three we have a downtime cost of
$10,125+$$9,615+$37,500 = $57,240
As you can see the cost of downtime can quickly escalate.
3. Because it makes you to pay SLA based penalties
Depending upon the nature of the business the SLAs can be very aggressive. Where large capital costs are riding on timely delivery, such as in airlines or a large manufacturer, any hiccup can cost the parent dearly, it is not uncommon for these vendor-supplier relationships to be tied with six figure SLA penalties.
A couple of years ago, Virgin Blue (now Virgin Australia) made its reservations systems vendor Navitaire pay almost 15 million dollars as damages because of Navitaire outages that lasted 11 days and affected thousands of Virgin Blue passengers. For those of us counting, this comes to 56,800 dollars per hour.
P = Penalty per hour of downtime
V = # of violations per year
D = Duration of downtime
Total Cost = P*V*D
Let’s assume BigMake, is an OEM supplier of compressors for a large refrigerator manufacturer CoolMe. CoolMe has a huge assembly line that comes to a standstill if any of their suppliers is slow on delivery. Because of space and cost constraints, CoolMe is unwilling to carry any more inventory than absolutely necessary. CoolMe has an SLA with BigMake that imposes penalties of $20,000 for every 15 minutes their assembly line is down. BakeMake assembly line went down four times last year for 15 minutes each and now they are evaluating the damages just from an SLA perspective.
P = $80,000/hr
V = 4
D= .25 hr
Total Cost = $80,000*4*.25 = $80,000
SLA penalties can be significant, as you do your downtime calculations do remember to take these into account.
4. Because it ruins your company’s reputation
How likely would you be to fly an airline that is always late, that repeatedly causes you to miss your connections or cuts into your family time because of tardy arrivals? Not very likely I would assume. An airline that has built a reputation of being late all the time will have a harder time attracting customers than one who has a stellar reputation. The hardship experienced in the form of lower ticket fares, better rewards programs or even better baggage allowance.
If the website of BigGigs is always down, the customers will slowly desert them and they will let their colleagues in other companies know. These customers will look past you and will make it much harder for you to attract them, because your former customers have built your reputation.
A while ago I had blogged about my ISP going down and forcing me to smell the coffee at Starbucks. Well, as I had alluded to in the write up, I have since changed the provider and am happily enjoying lower rates and better reliability from a competitor. Oh! I have also convinced a few of my friends to do the same. Interestingly the competitor did not have to do much to get my business; my vendor “coaxed” me into shopping for an alternative.
Downtime is Serious Business
As vendors with a strong reputation continue to charge a brand premium, ones with a poor one will continue to find themselves ridiculed in the social media and their brand shredded as they watch helplessly.
Downtime is serious business, you are a service provider and whether your customers are internal or external they expect their services to be available when they need them. It is their business that they trust you with, do not let them down. They cannot afford it and NEITHER can you!