Quantifying the Cost of an Outage

Considering every business is currently or will be a service provider, understanding the cost of an outage is huge as it relates to the customer’s view of value derived from the service. This can be organization-wide or just for technology outages.

Let me tell you a story as we start. Four years ago, my cable provider did something that has caused me to look for ways to replace them. Four years and I am still holding onto this, passionately. My family came home one Sunday from lunch after worship service to find a cable truck parked outside the house. No big deal, I thought. Well, I was wrong. My next-door neighbor was in the process of switching to cable from a different provider. The cable company outsources its “last mile” work to five different service providers for cost purposes. Well, this particular day, the guy dispatched to hook up the neighbor’s cable cut mine in the process. We had no internet or phone for 72 hours. Three full days without internet because of this one mistake. At the time, cable cost me $60 per month so the cable company offered me $6 in credits. The issue was that it cost me thousands of dollars because I had deliverables due. This is the same for the customers of every organization. They use your service because it provides value and allows them to perform their roles at a higher level. Once you reduce the value of your service to “credits”, you become transactional in nature and your service is devalued.

A Forrester Research paper reported that of organizations that declared an outage in the last five years, 38% of the respondents mentioned they were not aware of the overall cost to the organization. I contend that the other 62% had estimates too low.

In 2014, Gartner was the first to report the cost of network downtime at $5,600 per minute. Extrapolating that to an hour, they pointed out a study by Avaya that estimated hourly costs ranging from $140K to $540K depending upon the characteristics of the business.

Avaya had the number at $9,000 per minute. So did Vertiv. But that number was still way too low. The cost to many organizations is greater than this for many reasons. We will look at those a little later. But, let’s look at a few recent high-profile outages:

·        In March 2015, a 12-hour Apple store outage cost the company $25 million.

·        In August 2016, a five-hour outage in an operation center caused 2,000 canceled flights and an estimated loss of $150 million for Delta Airlines. Jetstar airline had an IT outage impacting millions of people in 2019.

·        In March 2019, a 14-hour outage cost Facebook an estimated $90 million. It was due to a server configuration change (THIS IS CHANGE MANAGEMENT!).

These numbers are still too low. How many loyal customers did Delta lose? The airline stranded everyone who had connecting flights. The loss of loyal customers must be factored into the equation, plus other intangible costs.

Garvey had some stats on downtime in the manufacturing space:

·        In 2016, the average cost of downtime across all businesses was $260,000 per hour. That was a 60% jump from 2014.

·        In some industries, the cost is considerably higher. In the auto industry, downtime can cost up to $50,000 per minute, which equals $3 million per hour.

·        Even so, the true cost of downtime is unknown. Consultants believe that 80% of industrial facilities are unable to accurately estimate their downtime. A common estimate is that factories lose anywhere from 5% to 20% of their productivity due to downtime.

·        Human error causes 23% of unplanned downtime in manufacturing. That is 2.5x higher than in other sectors.

If thinking just about an IT outage, remember that your business customers have options for service providers. They do NOT have to use your internal or contracted services. The world is expanding and so are the technology service provider choices.

Below are some aspects contributing to the cost of an outage (these can be organization-wide or just IT):

• ·        Lost revenue (credits are not enough as evidenced by my story above with the cable company)
• ·        Labor cost (internal and external labor) to restore services
• ·        Recovery costs (according to CloudRadar, more than half of all businesses need more than one hour to recover from a crashed application. Now, think of that for all outages, large and small)

·        Indirect costs

• Loss of brand reputation (How much reputation loss do you suffer if in the news?)
• Increased potential for customer churn
• Opportunity costs of downtime for employees, monetary resources, etc.
• SLA penalties
• Government/regulatory fines
• Litigation and settlement costs
• Stock price – (A prominent bank recently experienced a two-day outage that caused its stock price to drop 2.3% and then saw itself on the financial pages and television networks)

Given how many organizations underestimate the cost of an outage, it leads to underinvestment in service availability, capacity, and continuity. These are core tenets of service management.

The irony is that leaders do not want to talk about the cost of downtime or outages. Rather, they take false comfort in how things are supposed to work. But the idea is that these are UNPLANNED outages.

The problem statement is three-fold:

1.      How to prevent outages and reduce the amount of downtime

2.      How to calculate cost outages

3.      How to remain continuous during an impactful event

There are three ways to lower your exposure to unplanned outages and reduce the length of the outage:

1.      Bolster the service management program, especially:

• ·        change management,
• ·        incident management,
• ·        problem management,
• ·        event management, and
• ·        configuration management.
• ·        AND, these need to be mature.

2.      There is no set formula out there to calculate the cost of an outage that works for every organization. If someone tells you there is, they are misleading you. There are so many intrinsic costs that there is no one-size-fits-most formula. We, at Service Management Leadership, can help you calculate the cost for your organization. We have proprietary formulas to help quantify the cost of every type of outage.

3.      Have strong and mature business continuity and disaster recovery plans. This is another area where Service Management Leadership excels. Our clients were able to remain continuous during the pandemic.

How does your organization calculate the cost of an outage, either organization-wide or just IT?

Jeffrey Tefertiller is the founder of Service Management Leadership, a boutique consulting firm helping organizations quantiy the cost of business and IT outages as well as achieve service management, asset management, and business continuity goals and objectives.