WHAT SHOULD SMALL BUSINESS IT COST?
The cost of IT for a small business, or of poor IT, is $6,876 per employee per year. For a given business of ten employees, this cost will be $68,760 each year. How this figure is calculated is described in the following sections.
Follow along to understand how to calculate the cost of IT for your business and the variables that would have an effect on this cost.
WHAT ROLE DOES TECHNOLOGY PLAY IN YOUR BUSINESS?
Oftentimes it is difficult to accurately determine the importance of technology in our daily business operations. It is the ubiquity of our technologies, rather than their individual complexities that brings about this difficulty. From CRM systems to Inventory management, from your local workstations to cloud servers, technology has become a unavoidable for all modern businesses. All these technology solutions allow the productivity, efficiency, and effectiveness of a business to function at a level which would otherwise be unattainable.
In the modern age, technology has evolved beyond being a simple component of business into the singular point around which all other parts of a business must revolve.
If you think the above statement is an exaggeration, this simple test should demonstrate its truth. Shut down all computers and mobile devices in your workspace for an hour and try doing your work. How much work were you able to do?
WHAT DOES IT COST YOUR COMPANY?
The answer most commonly given to this question is the all-too-vague “It depends,” but that doesn’t actually answer the question in a meaningful way. Owners of businesses, small and large, know that exact dollar costs must be put on expenses. Any financial plan that doesn’t account for the cost of IT will have a gaping hole. The aphorism tells us that “failing to plan means planning to fail,” so let’s look at the details and come up with a better answer than “It depends”.
The cost of IT can generally be divided into the following categories:
- Hardware – Laptops, smartphones, networks, and servers
- Software and services – Applications, SaaS, and cloud services
- Personnel – Salary, hiring, and training
One can easily plan for the expenses in the first two categories. The devices you will purchase and the apps or software you will use can be static. In a similar way, personnel cost can also be determined- you can choose to hire someone or outsource your IT. The difficult task is calculating the cost of interruptions.
Interruption has two parts- lost time and opportunity cost. Lost time is the time your employees spend trying to solve their IT problems or in helping a colleague with their IT issues. A 2016 survey by Robert Half Technology determined that U.S. office workers on average waste 22 minutes each day dealing with IT-related issues. This adds up and becomes over 91 hours per year spent dealing with IT problems per employee.
Here is the math:
22 minutes/day x 5 days/week x 50 weeks/year = 5,500 minutes or 91.67 hours/year
If our average hourly rate per employee is $30 per hour, then
Cost of lost time = 91.67 hours/year x $30/hour = $2,750/year per employee
A business of ten employees would lose on average $27,500 every year.
WHAT IS THE OPPORTUNITY COST FOR IT?
Simply put, opportunity cost is the cost of a sacrifice you make when choosing one option over another. When your software engineer is spending time troubleshooting network connectivity problems rather than writing code, he/she is sacrificing their time doing a task that brings less value to your company. The code written would be of higher value than printer troubleshooting. The higher the value of a given employee’s work, the higher the opportunity cost of their time. If you are a CEO of a company and have to spend valuable time taking your laptop to the Genius bar or spend hours sourcing WiFi equipment, you are throwing cash out the window.. This is an implicit cost, which means you won’t see a cash outflow in your books. These costs are difficult to visualize and usually go unnoticed.
An expectation for anyone hired at a business is that the company will benefit from their work. Certain jobs such as administration and HR don’t bring in revenue but enable others to do so. Companies generally expect their workers to bring in two to three times their salary. A large part of this will go towards operational costs and overheads, making the net profit around 50-100%.
Using a conservative profit of 50%, let’s do some math again:
Opportunity cost = 91.67 hours/year x $30/hour x 1.5 = $4,125/year per employee
So for 10 employees that will amount to $41,250/year in opportunity cost.
Therefore, the cost of IT, or rather of poor IT operation and management, is $2,750 + $4,125= $6,876 per employee annually.
For a small 10 employee company, this figure works out to be $68,760 per year.
Now we have arrived at a figure more precise than “it depends”. This is a number we can work with. There have been some assumptions or generalizations made along the way, but the formula will hold for the specifics of most businesses.
WHAT IS THE COST OF DOWNTIME?
The minor interruptions we worked with above should not be conflated with a company-wide downtime caused by other events such as service provider-based outages or ransomware attacks. These more severe downtimes have a much larger effect on a business, especially if there is no business continuity or data backup plan. Frequent and extended downtimes not only ruin your business’s productivity, but they also have a negative effect on your reputation and reliability.
Downtimes always have a much larger impact on businesses than expected. After an interruption, time is spent refocusing and putting operations in their previous state. In addition, workers now must carry the stress and fatigue caused by the downtime as well as the knowledge that they are now behind on their work. If such a disaster were to happen during peak season, the consequences would be catastrophic.
HOW CAN THE COST OF IT BE REDUCED?
The cost of poorly managed IT services and extended downtimes is naturally high. Those costs can easily be reduced by working to reduce the time wasted. In doing so, opportunity cost is brought down.
Properly managed IT services provide the following functions:
- Make your IT infrastructure less prone to downtime
- Make your business will better prepared to handle emergencies, and
- Ensure business operations will be able to resume quickly
As companies increase in size, they need to stop spending time addressing minor IT issues and start preventing them with a proactive approach. With a growth in size, the complex issues in IT also grow. With these, the costs of unmanaged IT and downtime rise as well. Securing proper IT management gives businesses the insurance they need to work without stress. IT services will certainly not prevent all IT issues from happening, but getting the right IT support can help reduce the number of incidents as well as their severity. Additionally, having a capable IT team on call eliminates some of the stress and fatigue caused by potential and realized downtimes.
WHY SHOULD YOU HIRE A MANAGED IT SERVICE PROVIDER?
Having looked at the costs above, you may want to consider either hiring an internal IT team or outsourcing IT management. Hiring external management for your IT operations is a big step for many small business owners. Because IT is inevitably an integral part of the business strategy, it is imperative that IT is treated with the care it needs.
All the technology in the world isn’t worth anything if it isn’t serving the needs of your business and helping you achieve your goals in a more productive manner.
Instead of being overwhelmed by the challenging IT situations that will arise in your growing company, a good plan will help you identify at which stage you should get help with your IT services. Whether you hire IT staff in-house or contract an IT service provider, the decision should be based on your bottom line as well as the impact of IT on your core business strategy.