IT – Cost Center or Insurance Center?
A reddit poster, /u/asdlkf, offered a very interesting perspective on the current state of IT yesterday. He (or she) hypothesized that the days of IT being purely a cost center are in the past. These days companies need to view their IT staff and infrastructure as an insurance center, a piece of the company which offers varying levels of assurance and protection against outages depending on the amount of money they are willing to invest.
This really got me thinking about things and how absolutely correct this person was about how companies should approach IT. From the perspective of a company executive it is very important that they not simply look at IT a necessary evil costing the company precious dollars. Instead, they need to view us as an asset which provides assurances on the company’s most important assets. When determining budgets for their IT expenditures, it is not enough to simply calculate a few salaries with minimal support in terms of hardware and software licensing, expecting them to make miracles. These executives really need to consider how vital their core services are.
Consider this: How much would it cost your company if there was an 8-hour outage for your company e-commerce website? Once you’ve determined how much something like this can potentially cost your company, you next need to determine how much you’re willing to invest to prevent this from occurring.
Let’s use this as a hypothetical example:
- E-Commerce Site: Outage costs $100,000/hour
- IT Insurance Solutions:
- Scenario A: Cost to implement solution with no redundancy – $50,000/year
- Chance of 1-hour downtime per month – 70%
- Chance of 3-hours downtime per month – 20%
- Scenario B: Cost to implement solution with n+1 redundancy (all at the same site) – $250,000/year
- Chance of 1-hour downtime per month – 10%
- Chance of 3-hours downtime per month – 3%
- Scenario C: Cost to implementation solution with n+1 redundancy onsite and an additional n+1 solution in a geographically diverse area – $500,00/year
- Chance of 1-hour downtime per month – 1%
- Chance of 3-hours downtime per month – .1%
- Scenario A: Cost to implement solution with no redundancy – $50,000/year
The math above is extremely simplified but this will allow us to show how IT solutions can be presented in terms of an insurance center. A company’s finance/risk team can then perform some calculations to determine how much money to invest in IT to determine the proper amount of risk that should be taken.
For example, when looking at the potential for a 3-hour outage you could use the math below:
- Scenario A - Cost to reduce likelihood of 3-hour outage to 20% is $0 (as $50,000 is the minimum to provide support for the solution and is therefore not additional cost)
- $100,000/hour * 3 hours = $300,000 * 20% likelihood = $60,000/month average risk
- Annual Expected Cost of Downtime – $60,000/month * 12 months = $720,000
- Scenario B - For a cost of $200,000 ($250k minus the $50k mandatory cost) you can reduce the likelihood of a 3-hour outage per month from 20% to 3%.
- $300,000 * 3% likelihood = $9,000/month average risk
- Annual Expected Cost of Downtime - $9,000/month * 12 months = $108,ooo + $200,000 (upfront cost) = $308,000
- Scenario C - For a cost of $450,000 you can reduce the likelihood of a outage from 20% to .1%
- $300,000 * .1% likelihood = $300/month average risk
- Annual Expected Cost of Downtime - $300/month * 12 months = $3,600 + $450,000 = $453,600
Using the math above you can perhaps conclude that the best combination of cost and risk is Scenario B (which would expect to cost $308,000/year vs. $720,000 for Scenario A and $453,600 for Scenario C). Obviously, this is highly simplified and does not include all the necessary calculations for a real scenario (such as what is the risk of 10 hours downtime per month?). However, this gives you a good starting point to begin working with your management team on the importance of viewing IT not simply as a cost center but as an insurance center which offers varying levels of coverage based on their investment.
It is incredibly important for us as engineers to look at things not only from a technical perspective but also a business perspective. When communicating with the business about these different risks, we need to put it in terms they understand. If we fail to do this and we’re not given the support we desire then the failure is on us and not them. However, if you do provide them with this information then the burden is then shifted upon the business as it is their own assessment of the potential risks that made this decision.
This is one of the most challenging things to do as a technical person, to step outside our own world and work within the realm of another. However, this is the difference between a good engineer and a great one. A good one can build you a system that will give you 5 9′s reliance. However, a great engineer can design a system with 5 9′s reliance and then sell this system to the decision makers.
Always strive to be great.


















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