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The cost of data breaches: Looking at the hard numbers

As the frequency and gravity of security breaches has increased over the past few years, there have been several attempts to estimate the costs associated with them.

The estimates, however, have churned

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out vastly different figures, further adding to the confusion. For example, a U.S. Department of Justice study, published in August 2006, determined that the average loss per incident was $1.5 million. These calculations conflicted with a 2005 CSI/FBI survey that estimated the cost to be $167,000. Meanwhile, a 2006 Ponemon Institute survey figured expenses at $4.8 million per breach, while some CISOs put the cost to recover from a security incident at $1,000 per hour.

And if that dizzying array of estimates wasn't bewildering enough, a recent Forrester survey found that 25% of respondents do not know, or do not know how to determine, the cost of data security breaches. Puzzlingly, of companies that confirmed a personal data loss, 11% said that they did not incur any additional costs. But let me tell you, if you have a data breach, you will incur additional costs, significant enough to even put you out of business.

Tangible costs
Tangible costs are the unbudgeted expenses resulting from a security breach. These costs typically include legal fees, mail notification letters, calls to individual customers, increased call center costs and discounted product offers. Surprisingly, most estimates agree on this cost to be around $50 per record. This cost has increased slightly over previous years, but will continue to be somewhere around this number.

Regulations and lost employee productivity
When employees and contractors are diverted from their normal duties in order to address data breach controls, a company loses money. According to a Ponemon Institute survey, this cost had increased 100% in 2006 from $15 per record in 2005, to $30/record in 2006. The primary reason for this increase has been the growing number of entities and regulations that must be satisfied. Previously, if a company had a data breach, a security team fixed the problem, tested the mitigation and then the company resumed normal activities. Now, the threat of a data breach forces companies to satisfy the industry regulators, like the Payment Card Industry (PCI) Security Standards Council for credit card breaches, or the HIPAA auditors for healthcare regulations.

For more information on data security breach costs...

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As the ChoicePoint data breach has shown, where the personal financial records of more than 163,000 consumers had been compromised, the Federal Trade Commission and other judiciary committees may also get involved and impose their own requirements and restrictions. This cost is bound to increase in the future, as well.

Stock price
In the long run, a security breach does not have a significant effect on a company's stock price, but it could. A stock typically dips immediately after a data breach, but the price rebounds quickly, and after one year there is very little evidence of the breach affecting the stock.

The aftermath of the ChoicePoint data breach was an exception: its stock price fell 3.1% on the day the breach was reported, and then continued to fall. Five days after the story made the papers, its stock plummeted by nearly 10%. Now, almost two years after the data debacle, the stock is about 20% lower. The reason for its unique long-term loss can be linked to a change in its top-line offerings. ChoicePoint reacted to the breach by dropping some of its information products. So even though a company's stock may recover soon after a security blunder, a lengthy recovery period is certainly a possibility.

Opportunity cost
Companies also typically experienced customer losses after a breach, but the severity varies significantly as well. Typically, banks and hospitals have had the lowest churn rates, and retail outlets have had the highest.

A more significant issue at hand is the difficulty in acquiring new customers -- or new customer opportunities -- after a security breach. This number is hard to quantify, but most estimates compare these expenses to tangible costs. A Ponemon study, for example, puts opportunity cost at $98 per record, a 31% increase from 2005. This number is expected to grow as customers' security expectations increase and businesses compete on data protection technology.

Regulatory requirements and fines
When a breach occurs, both customers and regulators need to be satisfied. Regulators may impose additional security requirements or fines. For example, Visa levied $4.6 million in fines, penalizing companies that mismanaged sensitive customer data; the company levied $3.4 million in 2005. Similarly, ChoicePoint paid $10 million in civil penalties and $5 million in consumer redress to settle the Federal Trade Commission's demands. As laws and regulations increase, this cost will become much more significant.

Conclusion
All things considered, a security breach can cost you anywhere between $50 to $250 per record. Depending on how many records are at stake, individual breach costs may run into millions or even billions of dollars -- and organizations still aren't prepared to protect their environments. Although studies may not be able to determine the exact cost of a security breach in your organization, the loss of sensitive data can have a crippling impact on an organization's bottom line, especially if it is ill-equipped.

About the author:
Khalid Kark, CISSP, CISM is a senior analyst with Forrester Research Inc. in Cambridge, Mass., where he covers security strategy, including communication strategies, security organization, and the role of information security in corporate governance.
 

This was first published in March 2007

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