Regardless of size or industry, down time can have a dramatic effect on a business’s finances, processes and, most importantly, reputation.
Down time can come as the result of any number of issues, from a major weather event to a simple power outage or mechanical failure. It is something that all businesses are at risk of experiencing and a topic of concern for all business continuity practitioners.
“Companies try to harden themselves so they don’t go down and make sure there are redundancies and backup options,” Mark Carroll, Senior Vice President at Income Research + Management, said. “For example, in a point of sale environment those companies will do whatever is necessary to stay up.”
Although unplanned down time is never a good thing, Carroll said its cost is directly related to what type of business is affected, both in terms of reputation and finances.
“A customer coming to you and not being able to negotiate or discuss a business opportunity has an impact on your reputation,” Carroll said. “Even if the event doesn’t cost money or cause a lost sale there is going to be a reputation impact. The reputation impact is directly related to what you are and what you do. As a customer or prospect, if you’re a sand and gravel company, I’m not happy that you’re down and I’m possibly annoyed but if you’re a technology provider, then I would see that as a weakness in a core competency.”
Even if a company doesn’t actually lose out on a sale or the gain of a customer, downtime can still bring added costs in the form of time spent for recovery, delayed purchase and expenses put towards facilities.
“If you look at it from a cost vantage point, you have idle assets across that window of time,” Carroll said. “Even if I’m comfortable that a sale will come back to me later, it’s causing strain on my environment for the future because it is going to potentially require overtime and cause undue pressure on the supply chain. . Most businesses don’t build their environments with the capacity to take on the additional load that allows them to be down for a few days.”
Despite the potential impact, Carroll cautioned about overestimating losses due to down time, something he said is relatively common.
“What companies often do is take their revenue across a window of time and then dollarize what that translates into for down time,” Carroll said. “A company will say ‘our facility is open 365 day a year and we go down for two days, so is it a loss of two days revenue?’ Well, maybe and probably not. The down time may not cause a lost sale and the revenue may just be deferred. It overstates the impact.”
For example, a trip to your local pharmacy store for the purchase of standard over-the-counter items is met with a lock on the door due to a water break. What would you do? Most of us would go across the street to the completive pharmacy chain and buy what we needed. The result is a lost sale for the firm with the down situation.
Contrast that with a stop at a local car dealer, only to be greeted by the same situation, a water break. Would you then go to a competitor and purchase a totally different vehicle? Certainly not. You’ve invested too much in determining what you wanted to let a simple down situation affect your purchase. In fact, chances are you would not even go to another dealer for the same vehicle. Most (many) of us would wait a day or two until the impacted dealer opened. The result is a delayed sale, as contrasted with a lost sale. There is an impact, but it is not of the magnitude of a lost sale.
When it comes to recovering from and managing down time, Carroll said it starts at the top with the most basic communication.
“The phones have to ring. If they don’t there is a serious problem,” Carroll said. “If the phones work I have an opportunity to explain why we’re down, get your name and address and reach back out to you later. Phones are the starting point.”
He also said businesses need to focus on how to give back to their customers after they are back in service.
“When you are down there’s not much you can do,” Carroll said. “The issue becomes what is your response when you get back up. What will you do to make customers happy and apologize for their inconvenience?”
Carroll said business continuity practitioners are just beginning to scratch the surface of the true cost of down time.
“It’s been looked at for a long time but there has been no definitive agreement or understanding of what the downtime impact is,” Carroll said. “It would be great to find a secret sauce of downtime impact. Not strictly the dollarization, but if there were something to determine lost opportunity that would be great.”
The views contained in this article are those of the individual and not those of Income Research + Management.