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Understanding the Cost of IT System Failure to Your Business

When it comes to essential IT systems, businesses large and small are willing to make significant investments in their infrastructure. This only makes sense. In today’s automated world, a company with the latest and greatest IT system has a competitive edge.

 

Unfortunately, these investments don’t always pay off as expected. Despite your best efforts, at some point, you’ll experience issues with your software, hardware, or a combination of the two, and every minute of downtime costs your business money. How can we quantify these losses, and how can they be mitigated? Let’s take a closer look.

 

Measuring the Costs of IT Failure

 

The trouble with estimating the cost of an IT failure is that there are a lot of moving parts. Unless you’re talking about a tiny, isolated failure, it’s inevitably going to impact many aspects of your organisation. That said, your direct losses will fall into two general categories:

 

● Loss of an application or service. This can be more or less severe, depending on what has failed. Is your company email server not working? Are your customers unable to place orders? Is your call centre unable to receive customer phone calls? The exact nature of the outage will determine your costs.


● Loss of data. Losing data can have an even bigger impact on your business because data loss can be permanent. This can also have financial and even legal implications beyond the direct losses to your company.

 

It can also be helpful to think of IT failure costs in terms of direct and indirect costs. We’ll do that next.

 

IT System Failure – Direct Costs

Let’s start with the obvious. An unplanned system outage is never good news for your business. At the very least, you’re going to incur some direct costs. According to a 2008 study by IBM Global Services, the average revenue cost of an IT systems outage was $2.8 million per hour. And as we’ll see, that number has only gotten larger over the years.

 

Obviously, the exact costs will depend on the type of outage and the size of the company. But a major outage can ultimately disrupt your entire business. For example, suppose you run a retail store, and your ordering system goes out. If the system is down for a couple of hours, it’s just a minor inconvenience. But if it’s out for a day or more, you’ll fall behind on inventory orders. Your shelves will go bare, and your revenue will drop.

 

According to research by KPMG, 48 per cent of companies say that more than 24 hours of downtime is unacceptable. And for an additional 24 per cent, even a 2-hour outage will damage their business.

 

To put this in perspective, a Dunn & Bradstreet survey showed that 59% of Fortune 500 companies experience 1.6 hours of downtime per week or more. Now imagine that company has a systems failure that idles all of their employees. If that company has 10,000 employees, with average labour costs of $50 per hour, the labour downtime alone adds up to $800,000 per week in lost productivity. That’s more than $41,600,000 per year!

 

Needless to say, unless you’re running a very large company, you won’t be losing such large amounts of money. But for a small company, even one one-thousandth of that amount – $41,600 per year – could be a significant expense.

 

Missed Deadlines and Budget Overruns

According to the Harvard Business Review, 27% of IT projects run over budget, and 70% are not completed on time. At first glance, this might seem like any other sunk cost – the cost of doing business. But unfortunately, it’s not that simple.

 

When an IT failure causes a delay in one or more projects, the issue has a compounding effect on your business. Money that’s spent to complete the project is money you can’t spend on anything else. Employees have to be pulled off other projects to meet the labour needs. These are all extra costs that you won’t see immediately, but which can add up over time.

 

Bottom Line Impact

So, what do IT system failures actually cost? It depends on who you ask. Current estimates from top industry analysts range from $84,000 per hour on the low end, to $108,000 per hour on the high end. The most significant factor in determining costs is the type of industry. Energy, financial services, manufacturing, and telecommunications are the industries with the highest IT downtime costs.

 

Risks are particularly high for companies whose business requires a high rate of responsiveness; for example, an overnight courier service. If that business has to stop working for even a few hours, they can be forced to issue refunds, and could even be liable for financial damages. In these types of cases, it’s essential to partner with a qualified IT support company.

 

IT System Failure – Indirect Costs

Beyond the direct costs of an IT system failure, there are additional costs – financial and otherwise – that can significantly impact your business. In some cases, these can be even higher than the direct costs.

 

Reputational Damage

Lost sales aren’t just a one-time cost. Let’s say you run an online storefront selling supplies for a niche hobby. Your payment processor goes down for 24 hours, and you’re not able to take any orders. Some of your customers will get impatient, and order from a competing website. If they end up liking that website, they may start shopping there instead.

 

To truly understand the impact of a lost sale, you also have to consider the lifetime value of any lost customers. In some cases, this can be several times the immediate, direct cost.

 

Reputational damage is a major risk in the healthcare and financial services industries or any industry where you have access to your customers’ personal information. If this information is leaked due to a security breach, the loss of public trust can lose you a lot of business down the road.

 

Regulatory and Compliance Impact

If your IT failure causes you to miss a customer deadline or fail to follow through on contractual obligations, you will have to reimburse those customers. Worse, failure to meet the conditions of an SLA can land you in trouble with regulators, resulting in significant fines.

 

Remediation Costs

Following an IT system failure, extra work is often necessary to make up for the failure. For example, you may have been forced to keep paper records of credit card transactions during a system outage. When the system comes back online, the information will need to be manually input. This leads to overtime and other labour costs.

 

These costs can be even higher if your reputation has been damaged. You might need to run an entire marketing campaign just to repair the damage.

 

Morale Impact

Beyond the loss of revenue and reputation, there’s also the question of how a system outage affects your employees. If the system is one you’re running yourself, it has a direct effect on everyone involved. For an IT manager in particular, even a brief outage can feel like a personal failure. Executives could feel under pressure to find someone to blame, which can further erode morale.

 

A system outage also wears on anyone who has to help fix the damage. People who need to work overtime are missing time with their families, or giving up time on their hobbies. If this happens too often, your workforce will lose faith in their leadership, and top employees will start applying for jobs with your competitors.

 

Measuring Costs – Per Year or Per Incident?

When we talked about costs earlier, we looked at this from the perspective of cost over time. For the average Fortune 500 company, this comes out to around $46 million per year. No matter how you cut it, that’s a major expense. But it’s also a rough estimate.

 

The fact is, the costs of an IT system failure can vary widely depending on the issue. In one 2017 study of IT executives, their costs per hour ranged from $12,000 up to $1 million. That’s a significant variation! Perhaps more surprisingly, 35% of the executives who were surveyed said they had no idea how much IT system failures were costing their business.

 

On the high end, the losses from a single incident can be enough to damage the stock price. That’s what happened to Delta Airlines in 2017 when a single outage forced them to cancel 280 flights. The cost? More than $150 million.

 

That said, there are simply too many variables to list. What is the nature of the business? Did the outage occur during peak business hours or in the middle of the night? How long was your system out? Regardless, it’s important to conduct a thorough risk assessment, and understand how much a system failure could cost your business.

 

Are Costs Getting Higher?

Since the very first computers, there have been errors and system outages. As we’ve come to rely more and more on IT systems, the chances for failure have increased, and their potential impact has grown. But at the same time, people have been getting more experienced at managing these systems. IT managers know how to prevent many kinds of outages ahead of time, through proper system maintenance and good programming technique. So, have the costs of failure gone up or down over time? Let’s look at some numbers from the past couple of decades.

 

Back in 2004, Gartner conducted a survey and put the average hourly cost of downtime at $42,000 for a mid-sized company. In 2014, that number rose to $300,000 per hour. As you might imagine, that cost is only getting higher as time goes on.

 

But as we keep pointing out, these kinds of averages can be deceptive. For example, the financial cost of a system failure varies widely by industry. For the media sector, the average hourly loss is $90,000 per hour. But for large financial brokerages, the losses amounted to a staggering $6.48 million for every hour of downtime.

 

All of these averages are also heavily weighted by major corporations. In another recent survey of IT managers, only 20% of companies had costs higher than $12,000 per hour.

 

Calculating Costs For Your Business

If you want to calculate your company’s annual costs, there’s actually a simple formula. Here it is:

 

LOST REVENUE = (GR/TH) x I x H

 

The variables are:

GR = gross annual revenue

TH = total annual business hours

I = percentage of revenue lost during an outage

H = number of annual outage hours

 

IT System Failure – An Expected Outcome?

In a perfect world, IT systems would never fail. We’d all love to have networks that operate perfectly, 24/7. We’d all love to be able to deliver exactly the service our customers expect, every single time.

 

That’s a perfect world. This is reality. There is no organization on the planet, not even the US military, that experiences 100% uptime. It’s a worthy goal, but in a world of real people and real machines, it’s never going to happen.

 

The best we can do is follow best practices to keep downtime to a minimum. After that, all you can do is budget for the inevitable downtime, and mitigate the damage as necessary.

 

Minimise Your Risk With an IT Support Company

The costs of an IT system outage can be minor, or they can be catastrophic. One way to minimize those risks is to partner with an IT support company. And if you need small business IT support, Australia has a number of companies that offer small business IT solutions.

 

By contracting with an IT support company, you offload some of your risk to them. You also get the benefit of partnering with experts in the latest technology, who understand the risks and regulatory requirements of today’s IT landscape. Of course, you’ll still be exposed to some risks, such as your company’s reputation. That’s why it’s so important to partner with an IT support company that has a strong record for performance and customer support.

TAGS: disaster recovery planning, business continuity planning, outsourced