Calculating the True Cost of Downtime

Calculating the True Cost of Downtime

Today on the blog, learn how to calculate the true cost of downtime for your firm.

If you’re an investment manager who trades by the second, technology performance is increasingly crucial to the success of your business. Downtime is simply not an option. And in an ideal world, you true cost of downtimewould hope that no event ever causes downtime for your firm. In reality, however, there are many causes of downtime: hardware malfunctions, theft, human error, system crashes, power outages, natural disasters, fires, cyber-attacks, and rogue employees- to name just a few. According to Dun and Bradstreet, 59% of Fortune 500 companies experience an average of 1.6 hours of downtime every week. Whatever the reason, it is almost guaranteed, whether you are a start-up or an established firm, that you will experience downtime at some point.

Just over an hour and half of downtime per week may not seem like a huge number. However, when you consider that the cost of a single hours’ downtime can be anywhere between $15,000 and $1.5 million, it becomes an issue to take very seriously. But before investing in technology and policies that can help alleviate downtime to the business, such as disaster recovery (DR) technology, backup software, or a business continuity plan, it is often necessary to build a business case to prove value. And to build a business case, you must determine the true cost to the business when systems go down.

If you’re in the process of building a business case for disaster recovery, there are four key areas to consider. First, take note of your firm’s critical business applications. Most firms cannot function without an order execution and management system, because if this system is not available, they can’t trade. Market and analytics data is equally important because these systems inform of up to the second market conditions, which in turn, inform the trades. Email and messaging systems may be critical, but if trades could continue by phone then there is a viable workaround. Likewise, CRM, portfolio and risk management systems are vital depending on how often they are used by employees.

After taking stock of critical applications, determine how many employees would be impacted if critical systems were unavailable. Investment Managers are often supported by one or two non-investor administrators who manage the research, administration and marketing of a firm. Make sure you understand what percentage of these employees’ time is dependent on the systems that are unavailable. Next, determine the hourly rate of each employee. Divide the employee’s hourly rate by the percentage of time that they use the unavailable systems to find the proportion of hourly rate that is lost. Multiply that by the length of time the systems are unavailable.

When critical systems go down, there can be loss of revenue. Work out your loss of revenue by dividing your firm’s annual revenue by the total number of working hours per year and multiplying this by the length of downtime. The cost of not trading, in lost revenue, varies from firm to firm, but depending on the length of downtime, can make quite an impact.

Perhaps the most important point to consider when building a business case is the potential damage to a firm’s reputation if downtime occurs. Depending on the specific scenario, reputational damage can be especially difficult to recover from. For example, say there is a cyber-breach that causes your firm prolonged downtime and leads to lost revenue. While the monetary loss may be easily recovered over time, one investor may lose confidence that your firm is adequately protected, and pull his money from the firm. This can cause a chain reaction among investors, ultimately leading the collapse of a fund. As a result, it is incredibly important to be proactive about ensuring the correct protections are in place for your firm’s technology.

When it comes to actually mitigating the risk of downtime, you will need to employ a multi-pronged approach. To start, calculate your firm’s Recovery Point Objective, which is the point in time that data should be recovered to. If your firm depends on data being up to date to the second, your disaster recovery plan should take that into account. The Recovery Time Objective is the length of time that your firm can tolerate before lost data is back online. If your firm cannot tolerate any downtime, and requires backed up data to be 100% accurate, as many firms would say is the case, then your disaster recovery plan should take this into account as well. In this case, a completely redundant architecture, with real time replication offsite, might be the answer.

As with any DR planning, ensure that your plans are tested rigorously and regularly to ensure that they continue to meet your recovery objectives.