Finding the Hidden Costs of IT

Businesses rely heavily on their IT departments to design, build and manage complex systems and environments, as well as support business critical applications and processes. It’s no wonder that as the complexity levels of these solutions escalate so do the costs necessary to manage them.

Many IT costs are not easily identified. These “hidden costs” are often overlooked. This post is designed to help your business identify these hidden expenses, which combined with your known costs, form the true costs of your IT.

Hidden Cost	How to Calculate
Non-IT Employee Costs (Vendor Management)% of time non-IT employees spend managing vendors. This includes creating purchase orders, evaluating vendors, playing phone tag, trying to control finger pointing when issues arise, etc.	( Combined hourly rate of employees performing activities + benefits ) x ( # of hours spent on performing activities )
Non-IT Employee Costs (IT system / application evaluation)% of time employees spend researching IT systems / applications. Includes comparing costs, feature sets, evaluating t in organization, evaluating consultants for hire, etc.	(Combined hourly rate of employees performing activities + benefits) x (# of hours spent on performing activities)
Incorrect Solution (Non-usable applications)Includes applications, software or implementation expenses associated with a technical solution that did not work as promised, or function as expected, or was otherwise non-usable by the organization	( Combined hourly rate of employees that spent time training or using application + benefits ) x ( # of hours spent ) + ( All software costs not returnable )
Incorrect Solution (Non-usable hardware)Includes any hardware that did not function as expected, was unable to run expected systems or applications, or is otherwise non-usable by the organization	( Combined hourly rate of employees that spent time training or using new hardware + benefits ) x ( # of hours spent ) + ( All hardware costs not returnable or reusable )
Downtime (Non-IT Personnel)Any time non IT employees cannot access critical systems should be included	( Combined hourly rate of employees affected by outage + benefits ) x ( # of hours down )
Downtime (Penalties)Includes any financial penalties from customers or government performance regulations non-delivery of product / services due to outages	( All non-performance penalties Incurred ) + ( All non-delivery penalties Incurred )
Downtime (Additional IT costs associated with recovery)New equipment, additional billable hours to services and support, new software	( All additional hardware necessary for restoration of service ) + ( All additional software necessary for restoration of service ) + ( All additional hourly charges necessary for restoration of service )
Downtime (Loss of opportunity)Loss of opportunity cost = annual company revenue (22 days a month for 12 months) multiplied by % of day spent down multiplied % chance that sales were lost	These examples highlight three potential ways to estimate loss of opportunity costs. For simplicity we’ll use an example company that generated $10 Million in annual revenue. Calculate your own loss of opportunity costs by using the method that best suits your business.
Lost Sales by Day/Hour Use this equation if it’s easy for you to determine your average revenue per day (e-commerce businesses). For our example business, that’s $37,878 of lost revenue per day of downtime or $10,000,000 divided by (22 days per month multiplied by 12 months per year). If the majority of your business comes in during a smaller window of time, determine your revenue by hour. For example, if most of your business comes in during a 12 hour time frame, then you would lose approximately $3,156 per hour (average revenue per day divided by number of hours). Lost Sales by Transaction Use this equation if it’s easier to determine the number of sales your business makes in one year rather than your average revenue per day. To determine sales lost to one day of downtime, multiply your average number of sales per day by your average revenue per sale. If our example business’s $10 million in revenue comes from 12,000 sales, then they are averaging $833 per sale ($10,000,000 divided by 12,000 sales). Let’s say our example business averages 45 sales per day. The equation would be 45 sales multiplied by $833, which equals $37,498 in lost sales in one day of downtime. Deferred Profit Loss If your business is able to recover all your sales once your systems are back up, then you will incur deferred profit loss due to delays in order processing and billing. You can calculate your deferred profit loss by using the cost of money at 10%. Multiply your average revenue per day by 10% and then divide by 360 days in a year. Our example business that generates $37,878 of revenue in one day would incur $10.52 in lost profits per one day of downtime.

Only by examining these hidden costs with your personnel, equipment, software, utilities, third party contracts, conferences, training, travel, and material costs can you see a true picture of you IT expenses. Once you have the true number your better equipped to have the challenging discussion related to budgeting appropriately. This workbook will help you determine your complete IT spend.