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My Big Fat Data Breach Cost Post, Part III

IT Pros

This article is part of the series "My Big Fat Data Breach Cost Series". Check out the rest:

How much does a data breach cost a company? If you’ve been following this series, you’ll know that there’s a huge gap between Ponemon’s average cost per record numbers and the Verizon DBIR’s (as well other researcher’s). Verizon was intentionally provocative in its $.58 per record claim. However, Verizon’s more practical (and less newsworthy) results were based on using a different model that derived average record costs more in line with Ponemon’s analysis.

The larger issue, as I’ve been preaching, is that a single average for a skewed, or more precisely, a data set that follows a power law is not the best way to understand what’s going on. For a single number, the median, or the number where 50% of the data set lies below, does a better job of summarizing it all.

Unfortunately, when we introduce averages based on record counts, the problem is made even worse. Long sigh.

Fake News: Ponemon vs. Verizon Controversy

In other words, there are monster breaches in the Verizon data (based on NetDiligence’s insurance claim data) at the far end of the tail that result in hundreds of millions of records — and therefore an enormous denominator in calculating the average.

I should have mentioned last time that Ponemon’s dataset is based on breaches of less than 100,000 records. Since cyber incidents involve some hefty fixed amount costs for consulting and forensics, you’ll inevitably have a higher average when dividing the incident cost by a smaller denominator.

In brief: Ponemon’s $201 vs. Verizon’s $.58 average cost per record is a made up of controversy comparing the extremes of this weird dataset.

As I showed, when we ignore record counts and use average incident costs we get better agreement between Verizon and Ponemon – about $6 million per breach.

There’s a “but”.

Since we’re dealing with power laws, the single average is not a good representation. Why? So much of the sample is found at the beginning of the tail and the median — the incident cost where 50% of the incidents lie below — is not even close to the average!

My power law fueled analysis in the last post led to my amazing 3-tiered IOS Data Incident Cost Table©. I broke the fat-tailed dataset (based on NetDiligence’s numbers) into three smaller segments — Economy, Economy Plus, and Business Class —  to derive averages that are far more representative.

My Economy Class, which is based on 50% of the sample set, has an average incident cost of $1.4 million versus the overall average of $7.6 million. That’s an enormous difference! You can think of this average cost for 50% of the incidents as something like a hybrid of median and mean — it’s related to the creepy Lorenz curve from last time.

Ponemon and Pain

Let’s get back to the real world, and take another look at Ponemon’s survey. Their analysis is based on interviews with real people working for hundreds of companies worldwide.

Ponemon then calculates a total cost that takes in account direct expenses — credit monitoring for affected customer, forensic analysis —and fuzzier indirect costs, which can include extra employee hours and potential lost business.

These indirect costs are significant: for their 2015 survey, it represented almost 40% of the total cost of a breach!

As for the 100,000 record limit, Ponemon is well aware of this issue and warns that their average breach cost number should not be applied to large breaches. For example, Target’s 2014 data breach exposed the credit card number of over 40 million customers for a grand total of over $8 billion based on the Ponemon average. Target’s actual breach-related costs were far less.

One you go deeper into the Ponemon reports, you’ll find some incredibly useful insights.

In the 2016 survey, they note that having an incident response team in place lowers data costs per record by $16; Data Loss Prevention (DLP) takes another $8 off; and data classification schemes lop off an another $4.

Another interesting fact is that a large contributing factor to indirect costs is something called “churn”, which Ponemon defines as current customers who terminate their relationship as the result of loss of trust in the company after a breach.

Ponemon also estimates “diminished customer acquisition”, another indirect cost related to churn, which is the cost of lost future business because of damage to the brand.

These costs are based on Ponemon analysts reviewing internal corporate statistics and putting a “lifetime” value on a customer.

Feel the pain: Ponemon’s data on lost business.

Anyway, by comparing churns rates after a breach incident to historical averages, they can detect abnormal rates and then attribute the cost to the incident.

Ponemon consolidated the business lost to churn, additional acquisition costs, and damage to “goodwill” into a bar chart (above) divided by country. For the US,  the average opportunity cost of for a breach is close to $4 million.

With that in mind, it’s helpful to view the average cost per record breached as a measure of overall corporate pain.

What does that mean?

In addition to actual expenses, you can think of Ponemon’s average as also representing extra IT, legal, call center, and consultant person-days of work and emotional effort; additional attention focused in future product marketing and branding; and administrative and HR resources needed for dealing with personnel and morale issues after a breach.

All of these factors are worth considering when your organization plans its own breach response program!

Some Additional Thoughts

In our chats with security pros, attorneys, and even a small business owner who directly experienced a hacking, we learned first-hand that a breach incident is very disruptive.

It’s not just the “cost of doing” business as some have argued. In recent years, we’ve seen several CEO’s fired. More recently, with the Equifax breach, along with the C-suite leaving or “retiring”, the company’s very existence is being threatened through law suits.

There is something different about a data breach. Information on customers and executives, as well as corporate IP, can be leveraged in various creative and evil ways — identity theft attacks, blackmail, and competitive threats

While the direct upfront costs, though significant, may not reflect the $100 to $200 per record range that shows up in the press, a cyber attack resulting in a data exposure is still an expensive incident — as we saw above, over $1 million on average for most companies.

And for the longer term, Ponemon’s average cost numbers are the only measurement I know of that reflects the accounting for these unknowns.

It’s not necessarily a bad idea to be scared by Ponemon’s stats, and change your data security practices accordingly.






Andy Green

Andy Green

Andy blogs about data privacy and security regulations. He also loves writing about malware threats and what it means for IT security.


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