British Airways was hit recently by a major IT failure – Databarracks’ Peter Groucutt looks at what it may have cost the airline.
At the end of May, a power supply failure, triggered in a west London data centre, took down BA IT systems for around 70 countries, resulting in staff unable to check-in passengers. The fallout saw thousands of flights cancelled and an estimated 75,000 customers directly impacted. Despite questions remaining regarding the specifics of the incident and the failure of backup systems, it has highlighted the importance of IT resilience, as well as the need to understand what the cost of IT failure means for a business.
Defining the cost of downtime
Technology is fundamental to how we all deliver our business services. Effective IT can streamline processes, make significant cost savings and dramatically improve productivity across a business. This dependency on IT however can be a double-edged sword. The costs to the business of any downtime is much greater – as British Airways’ (BA) recent outage demonstrates.
Types of cost
There are several types of costs that need to be considered when estimating how much downtime will cost your organisation. To start with, there is lost revenue, staff cost and fines from regulators. These are the known, tangible costs. It is important however to look deeper for a more complete picture of the total cost. ‘Hidden’ and intangible costs such as damage to reputation can often outweigh the more obvious, immediate costs.
Airlines are particularly sensitive to IT outages because operations are time critical failures result in customer compensation. This outage for instance, is estimated to cost BA as much as £150m. Customer compensation is a standardised process for air travel with pre-set figures for flights and out-of-pocket expenses like hotels and food for passengers affected.
In other industries, customer compensation is much more difficult to estimate because there is not a formal process in place for how much should be paid. Businesses will provide refunds as a gesture of goodwill or offer discounts on future orders for customers but it is less obvious exactly what the total will be. The lesson for other industries here is to make those hidden costs real.
Calculating ‘hidden’ costs
The cost that is probably the most feared, but also least understood is the damage that downtime has on brand and the reputation.
For BA, that damage to reputation was felt immediately with a loss of €400m in share value from the parent company of BA, International Airlines Group (IAG). That loss in value is the market reacting to the incident. Organisations that are not publicly listed don’t have the immediate feedback of a share price to worry about, so must focus on the consequence of reputation damage.
Damage to reputation is felt in a reduction or loss of future revenue and the best way to understand it is to make it tangible and turn it into a real cost. If you had a small outage – for an hour for instance – what would happen? Would you lose 1 customer, or 5% of your customers? What if that incident lasted one a day, or two days?
What about a much longer outage of a week? How would your customers react? Our recommendation is to agree an organisational cost of downtime for both a short and longer outage.
Investment in IT resilience
The problem with these hidden or supposed intangible costs is that because they aren’t easy to estimate, they are excluded from calculations. The result is an underestimation of the importance of uptime to the business.
We use a simple method for determining how much should be spent on IT continuity and resilience. On a graph, we plot cost against the length of time of a disruption. We then plot the cost of the different levels of IT continuity solution against the recovery time that solution will provide. The point where these two lines cross gives you an immediate understanding of how much an organisation should invest. The graph also gives a very clear view of how underestimating your downtime costs results in underinvestment in resilience and continuity.
IT representation at board level
BA has been criticised for a lack of IT expertise at board level by a shareholder advisory group. As technologists, we would always advocate better representation for IT at the highest levels of a business. Technology is so foundational to the operations of most businesses that not understanding the IT means a not understanding the business itself.
In cases when IT is underrepresented at board level, it is even more important for IT and Business Continuity teams to present that strong business case for investment. The responsibility of the board is to make the best decisions for the shareholders of the business. If they are presented with a potential downtime cost of £100m and a high risk of outage they will have no choice but to invest in IT.