The real costs of third-party IT downtime

Third-party IT downtime could potentially be catastrophic for some companies. The technological solutions are a great way to mitigate the risks but there will always be some exposure left and that’s where the insurance industry can step in and offer a risk transfer solution.

Relying on third-party IT service providers is part of doing business in today’s digital-first world. Companies use third-party services for various mission-critical applications and functions, including cloud infrastructure, website hosting, e-commerce solutions, payment gateways, customer relationship management solutions (CRMs) and more. With so much dependence on third-party SaaS, PaaS and IaaS providers, what kind of impact do businesses experience when those systems which are out of their control go down?

IT downtime occurs, and fairly often. It can happen for many reasons such as connectivity errors, equipment failure, cyberattacks, but mostly it occurs because of human error. Outages that last only minutes cause inconvenience, but those that last for hours can have disastrous consequences for businesses.

How Frequently Do IT Outages Occur?

It’s more often than you think. In the US, nine out of 10 large businesses experience one network outage per year, while 69% suffered from two or more. During August and September of this year alone, Google suffered two outages while Zoom, Slack and Microsoft each racked up one. Internet service provider CenturyLink was down for nearly seven hours, impacting services from Cloudflare, Feedly, Amazon, Xbox Live, Hulu and Discord, to name a few. It also led to a 3.5% drop in global internet traffic.

The Cost of Downtime: Revenues

Gartner’s 2014 report revealed that downtime costs average out at $5,600 per minute while a study conducted two years later by Ponemon Institute estimated that the cost rose to $9,000 per minute. According to a 2017-2018 survey conducted by Statista, 25% of respondents reported an hour of server downtime costs them between $300,000 and $400,000.

To understand the financial impact of outages in a more tangible way, here are some of the costliest ones from the last few years:

  • Apple App Store, March 2015: The store was offline for nearly 12 hours, costing the company $25 million in lost revenue
  • Facebook, Messenger, Instagram & WhatsApp, March 2019: A 14-hour blackout resulted in revenue losses of nearly $89.6 million and a 2% drop in Facebook share prices
  • Amazon Web Services, March 2017: A four-hour outage cost the company’s customers an estimated $150 million

It makes sense that these mega-companies suffer from equally mega costs when downtime occurs, but because they have such high revenues, they can recover relatively quickly. For example, it was reported that during Q4 in 2019, Apple banked an average of $1 billion in revenue per day!

For small and medium-sized businesses (SMBs), the cost of downtime can be insurmountable. An Infrascale survey revealed just how damaging outages are for SMBs:

  • 10% of those surveyed said an hour of downtime costs them more than $50,000
  • 25% said the cost was between $20,000 and $40,000
  • 13% said the cost was between $40,000 and $50,000

The Cost of Downtime: Beyond Revenues

The Infrascale report exposed some of the other damages businesses suffer from outages. Nearly 37% of SMBs reported that they lost customers because of downtime. With the cost to acquire new customers significantly higher than keeping a customer and reducing churn, those losses impact the bottom line.

Although somewhat less concrete, downtime can harm a brand’s image. If customers continue to encounter glitches and outages when visiting a site, they will not only stop using that company’s products and services but will often discuss their less than stellar experiences with others. Once that happens, brands need to work significantly harder to repair their image.

Another area that is heavily impacted by downtime is productivity. When there’s downtime, the reason isn’t clear and complete chaos takes over. The entire R&D team needs to shift their attention away from their work to respond to the event, investigate what is going on, what the downtime event is due to, and what needs to happen in order for the company to bounce back as soon as possible. While that’s happening, the rest of the company’s employees are left twiddling their thumbs for hours while the service is down. On top of that, even a small interruption can reduce productivity. One study found that it takes people an average of 23 minutes to refocus after any interruption.

What Can a Business Do?

Downtime and outages are going to happen, and often. Companies can take steps to reduce the likelihood that an outage will occur by building more resilient infrastructure and using other technology solutions like disaster recovery and redundancy in the cloud. In the end, downtime is inevitable and all those solutions don’t offer complete protection. The technological solutions are a great way to mitigate the risks but there will always be some exposure left and that’s where the insurance industry can step in and offer a risk transfer solution.

Yonantan Hatzor
A successful entrepreneur, Yonatan co-founded Parametrix in 2018 based on his realization that cloud downtime was a growing, unaddressed risk for businesses.
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October 5, 2020