Online retailers stand to lose revenue in lost sales. SaaS providers are most concerned by unmet SLA commitments. Fintech firms are sensitive to downtime, as their customers can’t carry out critical transactions. And all companies are vulnerable to lost productivity. According to Information Technology Intelligence Consulting (ITIC), 40% of enterprises said a single hour of downtime can cost between $1 million and over $5 million – exclusive of any legal fees, fines or penalties. In a Gartner survey, 98% of companies stated the cost of IT downtime ranged from $100,000 to $540,000 per hour.
So how do businesses calculate the cost of cloud downtime?
Think of annual revenue reports. You’re doing everything to hit your targets, and boom - the cloud fails. Your sales channel is out of commission. This could happen in the middle of the night, or it could happen in the middle of Cyber Monday. Either way, the revenue you were counting on is gone. The math is clear: how much revenue does your business generate per hour through cloud-dependent sales channels? Boston-based home goods e-retailer Wayfair sold $14.1 billion online in 2020. That translates into $38.6 million a day, and roughly $1.61 million an hour.
So, from a direct revenue perspective, 4 hours of downtime could cost Wayfair $6.44 million: less if it happens in the middle of the night, and a lot more if it’s at the peak of the holiday shopping season. But the costs go beyond just lost sales
Wasted marketing spend
Businesses invest heavily in their brand, in building an effective website to impress and convert, and in running digital campaigns to direct traffic to their online assets. So, when the cloud fails, not only are they losing marketing spending, but they’re also actually paying to direct traffic to a dead end - or worse - to their competitors. Roblox is a large, popular gaming platform enjoyed by more than 150 million users. In 2020, they spent 6.3% of their $920 million revenue on marketing, to bring gamers to their platform. That’s nearly $58 million, or $160,000 a day. Imagine spending $160,000 on a campaign to direct traffic to a non-functioning site. Your marketing spending is lost. You’re actually paying to bring gamers to see your idle site.
Missed SLA commitments
Many businesses are contractually obligated by Service Level Agreements (SLAs) to provide service within a set amount of time. This becomes impossible when 3rd party IT fails them.
It’s particularly painful for SaaS and Fintech companies, where every second is critical for carrying out a transaction. After crashes, many B2B businesses are legally obligated to compensate customers. B2C companies may not be but often choose to pay in cash, coupons, or credits to contain the PR crisis. In June 2020, trading platform Robinhood was fined $70 million by the Financial Industry Regulatory Authority. Part of the sum was directed to compensating customers for several systemwide outages that occurred several months earlier. Businesses that provide services - especially regulated ones - are expected to do everything in their power to ensure business continuity. They must address cloud downtime as part of their contingency plans.
Many companies rely on the public cloud for their development efforts and to communicate. It’s how colleagues reach out to each other, how developers create and implement new code, and how they roll out new versions and features. Very often when the cloud crashes, email may fail, and Slack may malfunction. In fact, the ability to do anything productive could come to a screeching halt. Lost productivity hurts across the board. According to the Society for Human Resource Management, salaries account for 18-52% of any business’ operating budget. For a company with a $500M operational budget, and a 30% spend on salaries: a workday lost to downtime would cost $575,000 in salaries - to pay workers who can’t work. That’s $64,000 lost for every hour of downtime during work hours.
Tarnished brand reputation
One of the biggest pains facing companies during downtime events is disappointed customers. Social media, and platforms like Downdetector.com, where users register downtime complaints, become fertile ground for sharing negative sentiments. Customers may look elsewhere for a similar service, while negative comments may deter prospects from trying your brand. CEOs and CFOs want to stay on budget and promote profitability. Investment in disaster recovery should be a top priority and here’s why: the Economist looked at eight notable companies that survived crises and found they were, on average, worth 30% less than similar companies that weren’t embroiled in crises. Crisis preparation can cost your business anywhere from $60,000 to $500,000 (based on industry, size, and market reach.) After a crisis, you’d need to shell millions of unplanned dollars to mitigate and make up for lost revenue, a damaged reputation, and lost shareholder value.
Downtime is manageable
Downtime happens. It’s critical to acknowledge and accept. But there are steps companies can take to reduce and mitigate the risk. They can build resilient infrastructure and implement disaster recovery and redundancy across their infrastructure. Companies need to strike the right balance: what level of risk can they tolerate without compromising their business?
At the end of the day, downtime is inevitable and even the best protection isn’t complete. Technology offers products to mitigate the risks of 3rd party IT downtime. But there will always be some exposure, and that’s where insurance can bridge any gaps and provide coverage when everything else fails. Getting coverage promotes resilience, business continuity, and ensures your business can recover fast from cloud outages.
Written by Liran Bouskila, CFO at Parametrix