2014 Cost of Data Breach Study: Australia Benchmark research sponsored by IBM Independently conducted by Ponemon Institute LLC May 2014

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20141 Cost of Data Breach Study: Australia Ponemon Institute, May 2014

Part 1. Introduction IBM and Ponemon Institute are pleased to present the 2014 Cost of Data Breach Study: Australia, our fifth annual benchmark study concerning the cost of data breach incidents for companies located in Australia. In this year’s study, the average per capita cost of a data breach 2 increased from $141 to $145. The total average cost paid by a company increased from $2.72 million to $2.80 million. For the first time our study looks at the likelihood of a company having one or more data breach occurrences in the next 24 months. Based on the experiences of companies participating in our research, we believe we can predict the probability of a data breach based on two factors: how many records were lost or stolen and the industry. Specifically companies in retail and financial services are far more likely to have a breach. In contrast, energy and transportation are least likely to have a breach. In all cases, it is more likely a company will have a breach involving 10,000 or fewer records than a mega breach involving more than 100,000 records. Interviews with the organisations represented in this year’s benchmark study took place during a time of large and well-publicised data breaches, especially in retail. The occurrence of these breaches and the experiences reported in this year’s study is evidence that sensitive and confidential information continues to be at risk. The Cost of Data Breach research series was launched nine years ago in the United States. Since then, we have expanded the study to include Germany, France, Australia, Italy, Japan and Brazil. For the first time this year, we introduce data breach costs for a cluster of two middleeastern nations – the United Arab Emirates and Saudi Arabia. To date, 100 Australian companies and organisations have participated in the benchmarking process. This year’s study examines the costs incurred by 22 Australian companies in 11 industry sectors after these companies experienced the loss or theft of protected personal data and then had to notify breach victims and/or regulators as required by law. It is important to note the costs presented in this research are not hypothetical but are from actual data loss incidents. They are based upon cost estimates provided by the more than 170 individuals we interviewed over a 10month period in the companies that are represented by this research. The number of breached records per incident this year ranged from approximately 5,600 records to 57,000 records in this year’s study. The average number of breached records was 20,073. We do not include organisations that had data breaches in excess of 100,000 because they are not representative of most data breaches and to include them in this study would skew the results. The data breach costs for the 22 data breach case studies in this year’s report are presented in Appendix 1. The following are the most interesting findings and implications for organisations: 

The cost of data breaches continues to increase. For the fifth consecutive year, the cost per lost or stolen record increased. In 2013, the cost was $141 and increased by $4 to $145 in 2014. We define a record as information that identifies an individual whose personal information has been compromised in a data breach.



The total average cost of data breach increased. The average total cost of data breach increased for a company increased from $2.72 million in 2013 to $2.80 million in 2014.

1

The Cost of Data Breach report is dated as a 2014 publication. Please note that the majority of data breach incidents studied in this year’s report happened in the 2013 calendar year. 2 The terms “cost per compromised record” and “per capita cost” have equivalent meaning in this report.

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

More customers are abandoning the company following the data breach. Average churn rates increased 5 percent, which means more customers are terminating their relationship following a data breach. Despite declining churn, certain industries, such as financial and service companies are more susceptible to high customer churn, which causes their data breach costs to be higher than other industries. Taking steps to keep customers loyal and repair any damage to reputation and brand can help reduce the cost of a data breach.



Malicious or criminal attacks are most often the root cause of the data breach. Forty-six percent of companies in this study say the root cause was malicious or criminal attacks. This increased from 43 percent in 2013. Twenty-seven percent of breaches involved negligent employees or contractors and 27 percent say it was due to IT and business process failures. Accordingly, companies need to focus on processes, policies and technologies that address threats from the malicious insider or hacker.



Malicious or criminal attacks are the most costly data breaches. The per capita cost of a data breach caused by data theft or abuse averaged $161. In comparison, the cost of a data breach involving a system glitch or negligent employee (human factor) cost $136 and $128 per compromised record, respectively.



Lost business costs increase to a new high. The cost associated with business losses increased from $0.76 million in 2013 to $0.85 million in 2014. These costs refer to abnormal turnover of customers (a higher than average loss of customers for the industry or company), increased customer acquisition activities, reputation losses and diminished goodwill.



Detection and escalation cost increase slightly. The costs associated with detection and escalation activities increased from $1.04 million in 2013 to $1.07 million in 2014. This category refers to activities that enable a company to detect the breach and determine its root cause. It also includes upstream and lateral communications that are required to focus activities on the resolution of the data breach and keep management informed.



Post data breach response costs increase significantly. The costs associated post data breach response increased from approximately $0.81 million in 2013 to $0.82 million in 2014. These costs refer to all activities that attempt to address victim, regulator and plaintiff counsels’ concerns about the breach incident. This cost category also includes legal and consulting fees that attempt to reduce business risk and liability. Redress, identity protection services and free or discounted products are also included in this cost category.



Certain organisational factors decrease the overall cost. If the company has a strong security posture in place prior to the data breach, the average cost of a data breach was reduced as much as $13 per compromised record. In addition, an incident response plan, business continuity management and the appointment of a CISO saved as much as $10, $9 and $3 per compromised record, respectively.



Business continuity management reduced the cost of a breach. For the first time, the research reveals that having business continuity management involved in the remediation of the breach can reduce the cost by an average of $9 per compromised record.



Specific attributes or factors of the data breach increase the overall cost. For example, data breaches caused by the loss or theft of data bearing devices increased data breach cost by as much as $15 per compromised record. Data breaches involving third-party organisations, such as a vendor or business partner, increased the average per capita cost by $13. Finally, quick notification of the data breach and the engagement of outside consultants increased the per capita cost by $4 and $3, respectively.



How likely is it that your organization will have a data breach? As part of understanding the potential risk to an organization’s sensitive and confidential information, we thought it

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would be helpful to understand the probability that an organisation would have a data breach. To do this, we extrapolate a subjective probability distribution for the entire sample of participating companies on the likelihood of a material data breach happening over the next two years. The results show that a probability of a material data breach involving a minimum of 10,000 records is nearly 18 percent. In addition to overall aggregated results, we find that the probability or likelihood of data breach varies considerably by industry. Retail companies have the highest estimated probability of occurrence at 21.3 percent, while transportation has less than a one percent likelihood of having a breach

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Cost of Data Breach FAQs What is a data breach? A breach is defined as an event in which an individual’s name plus Social Security number, medical record and/or a financial record//debit card is potentially put at risk—either in electronic or paper format. In our study, we have identified three main causes of a data breach. These are a malicious or criminal attack, system glitch or human error. The costs of a data breach can vary according to the cause and the safeguards in place at the time of the data breach. What is a compromised record? We define a record as information that identifies the natural person (individual) whose information has been lost or stolen in a data breach. Examples can include a retail company’s database with an individual’s name associated with credit card information and other personally identifiable information. Or, it could be a health insurer’s record of the policyholder with physician and payment information. In this year’s study, the average cost to the company if one of these records is lost or stolen is $145. How do you collect the data? Ponemon Institute researchers collected in-depth qualitative data through interviews with more than 170 individuals conducted over a ten-month period. Recruiting companies for the 2014 study began in January 2013 and interviews were completed in March 2014. In each of the 22 participating companies, we spoke with IT, compliance and information security practitioners who are knowledgeable about their company’s data breach and the costs associated with resolving the breach. For privacy purposes we do not collect any companyspecific information. How do you calculate the cost of data breach? To calculate the average cost of data breach, we collect both the direct and indirect expenses incurred by the company. Direct expenses include engaging forensic experts, outsourcing hotline support and providing free credit monitoring subscriptions and discounts for future products and services. Indirect costs include inhouse investigations and communication, as well as the extrapolated value of customer loss resulting from turnover or diminished customer acquisition rates. How does benchmark research differ from survey research? The unit of analysis in the Cost of Data Breach study is the company. In survey research, the unit of analysis is the individual. We recruited 22 companies to participate in this study. Data breaches ranged from a low of about xxx to slightly more than 170 compromised records. Can the average cost of data breach be used to calculate the financial consequences of a mega breach such as those involving millions of lost or stolen records? The average cost of a data breach in our research does not apply to catastrophic or mega data breaches because these are not typical of the breaches most organisations experience. In order to be representative of the population of Australian companies and draw conclusions from the research that can be useful in understanding costs when protected information is lost or stolen, we do not include data breaches of more than 100,000 compromised records in our analysis. Are you tracking the same companies each year? Each annual study involves a different sample of companies. In other words, we are not tracking the same sample of companies over time. To be consistent, we recruit and match companies with similar characteristics such as the company’s industry, headcount, geographic footprint and size of data breach. Since starting this research more than nine years ago, we have studied the data breach experiences of 100 Australian companies and organisations.

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Part 2. Key Findings In this section we provide the detailed findings of this research. Topics are presented in the following order:       

Understanding the cost of data breach The root causes of data breach Factors that influence the cost of data breach Trends in the frequency of compromised records and customer turnover Trends in the cost components of data breach The likelihood an organization will have a data breach Recommendations on how to mitigate the risk and consequences of data breach

Understanding the cost of data breach The cost of data breach continues to increase. Figure 1 reports the average per capita cost of 3 data breach. For five consecutive years the average per capita cost increased. According to this year’s benchmark findings, data breaches cost companies an average of $145 per compromised record – of which $81 pertains to indirect costs including abnormal turnover or churn of customers and $64 are direct costs incurred to resolve the data breach. Last year’s average per capita cost was $141 with an average indirect cost of $81 and an average direct cost of $60. Figure 1. The average per capita cost of data breach over five years Bracketed number defines the benchmark sample size

$150

$145

$145

$141 $138

$140 $135 $128

$130 $125

$123

$120 $115 $110 2010 (16)

2011 (19) Per capita cost

2012 (22)

2013 (21)

2014 (22)

Five-year average

3

Per capita cost is defined as the total cost of data breach divided by the size of the data breach in terms of the number of lost or stolen records.

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The total average organisational cost of data breach increases. The average total cost to organisations continues to increase over five years, as shown in Figure 2. The total cost of data breach increased from $2.72 million in 2013 to $2.80 million in 2014. Figure 2. The average total organisational cost of data breach over five years $000,000 omitted $3.00 $2.50 $2.00

$1.97

$2.00

2010 (16)

2011 (19)

$2.72

$2.80

2013 (21)

2014 (22)

$2.16

$1.50 $1.00 $0.50 $2012 (22)

Average total cost (000,000 omitted)

Five-year average

The measures behind the cost of data breach increase. To understand the reasons behind the rise in costs, Figure 3 reports the four net changes from last year’s report. The primary contributor to the increase is abnormal churn, which increased 5 percent since last year. In the context of this paper, abnormal churn is defined as the greater than expected loss of customers in the normal course of business. Both the average per capita and organisational cost of data breach increased 3 percent. The average size of data breaches decreased 1 percent. Figure 3. Cost of data breach measures Net change defined as the difference between the 2014 and 2013 results

Abnormal churn

5%

Average total cost

3%

Per capita cost

3%

Average size of data breach

-1%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

Percentage net change over one year

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Certain industries have higher data breach costs. Figure 4 reports the per capita costs for the 2014 study by industry classification. While a small sample size prevents us from generalising industry cost differences, financial, industrial and energy companies tend to have a per capita cost higher than the mean, while companies in transportation, retail and public sector have a per capita cost significantly below the mean. Figure 4. Per capita cost by industry classification of benchmarked companies Financial

$225

Industrial

$188

Energy

$162

Consumer

$150

Services

$145

Communications

$136

Hospitality

$130

Technology

$130 $104

Public Retail

$100

Transportation

$91 $-

$50

$100

$150

$200

$250

Per capita cost by industry

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The root causes of a data breach Malicious or criminal attacks are the primary root causes of a data breach. Figure 5 reveals the main root causes of a data breach for all 22 companies. Forty-six percent experienced a 4 malicious or criminal attack. Twenty-seven percent of incidents involved a negligent employee or 5 contractor , and another 27 percent involved system glitches. Figure 5. Distribution of the benchmark sample by root cause of the data breach

27% Malicious or criminal attack

46%

System glitch Human error

27%

Malicious attacks are most costly. Not only are malicious attacks the most prevalent, they are also more expensive to remediate. Hackers or criminal insiders (employees, contractors and other third parties) typically caused the data breach as determined by the post data breach investigation. Figure 6 reports the average cost of data breach for three root causes. Companies that experienced data misuse or theft (exfiltration) had the highest per capita cost ($161). System glitches had an average per capita cost at $136 and Employee or contractor negligence resulted in a per capita cost of $128. Figure 6. Per capita cost for three root causes of the data breach $180

$161

$160

$136

$140

$128

$120 $100 $80 $60 $40 $20 $Malicious or criminal attack

System glitch

Human error

Per capita cost by root cause

4

Malicious and criminal attacks increased from XX percent in our 2013 study. The most common types of attacks include malware infections, criminal insiders, phishing scams and SQL injection. 5 Negligent insiders are individuals who cause a data breach because of their carelessness, as determined in a post data breach investigation.

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Factors that influence the cost of data breach. Table 1 lists the 8 key factors that influence the cost consequences of a data breach incident. Table 1 8 factors that impact data breach cost CISO (or equivalent title) has overall responsibility for enterprise data protection. The company had an incident management plan at the time of the data breach event. The data breach involved lost or stolen devices (including mobile devices such as smart phones and tablets). Data was lost due to third party errors, glitches or misuse that causing an incident. The company’s business continuity management team provides substantial support in containing the negative impact of the incident. The company had a relatively strong security 6 posture at the time of the incident. Consultants were engaged to help remediate the data breach. The company notified data breach victims quickly (within 30 days after discovery of the incident)

Percentage of companies exhibiting this attribute 50% 50% 45% 45% 41% 36% 32% 27%

As shown in Figure 7, strong security posture, incident response plans, business continuity management and CISO appointments decreased the per capita cost of data breach. However, lost or stolen devices, third party involvement in the breach, quick notification of the victims and engagement of consultants increased the cost. Specifically, a strong security posture reduced the average cost of data breach from $145 to $132 (decreased cost = $13). In contrast, lost or stolen devices increased the average cost to as much as $160 (increased cost = $15). Figure 7. Impact of eight factors on the per capita cost of data breach Lost or stolen devices

$15

Third party involvement

$13

Quick notification

$4

Consultants engaged

$3

CISO appointed

$(3)

BCM involvement Incident response plan

$(9) $(10)

Strong security posture $(13) -$15

-$10

-$5

$0

$5

$10

$15

$20

Difference from mean

6

This attribute is defined as the percentage of companies that achieved a Security Effective Score (SES) at or above the top third of all recorded results (i.e., scored norms). The SES was developed by Ponemon Institute in its annual encryption trends survey to define the security posture of responding organizations. The SES is derived from the rating of 24 security features or practices. This method has been validated from more than 40 independent studies conducted since June 2005. The SES provides a range of +2 (most favorable) to -2 (least favorable). Hence, a result greater than zero is viewed as net favorable.

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Trends in the frequency of compromised records and customer turnover The more records lost, the higher the cost of data breach. Figure 8 shows the relationship between the total cost of data breach and the size of the incident for 22 benchmarked companies in ascending order by the size of the breach incident. The regression line clearly indicates that the size of the data breach incident and total costs are linearly related. In this year’s study, the cost ranged from $.853 million to $8.5 million. Figure 8. Total cost of data breach by size of the data breach Regression = Intercept + {Size of Breach Event} x β, where β denotes the slope.

$9,000,000

$8,530,621.00

$8,000,000 $7,000,000 $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $0

Ascending order by the size of the data breach Total average cost

Regression

The more churn, the higher the per capita cost of data breach. Figure 9 reports the distribution of per capita data breach costs in ascending rate of abnormal churn. The regression line is upward sloping, which suggests that abnormal churn and per capita costs are linearly related. This pattern of results is consistent with benchmark studies completed in prior years. Figure 9. Distribution of abnormal churn rates in ascending order by per capita costs Regression = Intercept + {abnormal churn rate) x β, where β denotes the slope.

$300 $252

$250 $200 $150 $100 $50 $-

Ascending order by abnormal churn rates Per Capita

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Regression

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Certain industries are more vulnerable to churn. Figure 10 reports the abnormal churn rate of benchmarked companies for the present study. While a small sample size prevents us from generalising the affect of industry on churn rates, our 2014 industry results are consistent with prior years – wherein financial and service companies experienced relatively high abnormal churn 7 and public sector and retail companies experienced a relatively low abnormal churn. The implications are that industries with the highest churn rates could significantly reduce the cost of a data breach by putting an emphasis on customer retention and activities to preserve reputation and brand value. Figure 10. Abnormal churn rates by industry classification of benchmarked companies Financial

6.1%

Services

5.0%

Technology

3.9%

Communications

3.8%

Industrial

3.3%

Transportation

3.1% 2.4%

Consumer Energy

2.3%

Hospitality

1.8%

Retail Public 0.0%

1.7% 0.2% 1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Abnormal churn rates by industry

7

Public sector organisations utilize a different churn framework given that customers of government entities typically do not have an alternative choice.

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Trends in the components of a data breach Detection and escalation costs increase slightly. Figure 11 shows the distribution of costs associated with detection and escalation of the data breach event. Such costs typically include forensic and investigative activities, assessment and audit services, crisis team management, and communications to executive management and boards of directors. As noted, average detection and escalation costs significantly increased from $1.04 million in 2013 to $1.07 million. Figure 11. Average detection and escalation costs over five years $000,000 omitted $1.20 $1.04

$1.07

2013 (21)

2014 (22)

$1.00 $0.80

$0.73

$0.66

$0.77

$0.60 $0.40 $0.20 $2010 (16)

2011 (19)

2012 (22)

Detection & escalation costs (000,000 omitted)

Average

Notification costs decreased. Figure 12 reports the distribution of costs associated with notification activities. Such costs typically include IT activities associated with the creation of contact databases, determination of all regulatory requirements, engagement of outside experts, postal expenditures, secondary contacts to mail or email bounce-backs and inbound communication set-up. This year’s average notification decreased from $0.088 million in 2013 to $0.059 million in 2014. Figure 12. Average notification costs over five years $000,000 omitted $0.100

$0.088

$0.090 $0.080

$0.077

$0.076

$0.076

$0.070

$0.059

$0.060 $0.050 $0.040 $0.030 $0.020 $0.010 $2010 (16)

2011 (19)

2012 (22)

Notification costs (000,000 omitted)

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2013 (21)

2014 (22)

Average

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Post data breach costs increase slightly. Figure 13 shows the distribution of costs associated with ex-poste (after-the-fact) activities. Such costs typically include help desk activities, inbound communications, special investigative activities, remediation activities, legal expenditures, product discounts, identity protection services and regulatory interventions. Average ex-poste response cost increased from $0.81 million in 2013 to a five-year high of $0.82 million in 2014. Figure 13. Average post data breach costs over five years $000,000 omitted $0.90

$0.81

$0.82

2013 (21)

2014 (22)

$0.80 $0.70 $0.60

$0.57 $0.50

$0.50

$0.47

$0.40 $0.30 $0.20 $0.10 $2010 (16)

2011 (19)

2012 (22)

Ex-poste response costs (000,000 omitted)

Average

Lost business costs increase to new high. Figure 14 reports lost business costs associated with data breach incidents over five years. The cost category typically includes the turnover of customers, increased customer acquisition activities, reputation losses and diminished goodwill. As can be seen below, lost business costs increased from $0.76 million in 2013 to $0.85 million in 2014. Figure 14. Average lost business costs over five years $000,000 omitted $0.90

$0.76

$0.80 $0.70

$0.85

$0.84 $0.69

$0.66

$0.60 $0.50 $0.40 $0.30 $0.20 $0.10 $2010 (16)

2011 (19)

2012 (22)

Lost business costs (000,000 omitted)

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2013 (21)

2014 (22)

Average

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Companies continue to spend more on indirect costs. Figure 15 reports the direct and indirect cost components of data breach on a per capita basis. The indirect cost of data breach per compromised record actually stayed constant, $81 in 2013 and $81 in 2014. The direct per capita cost of data breach increased from $60 in 2013 to $64 in 2014. Figure 15. Direct and indirect per capita data breach cost over five years $160 $140 $120 $100

$82

$81

$81

$52

$56

$60

$64

2011 (19)

2012 (22)

2013 (21)

2014 (22)

$67

$76

$58

2010 (16)

$80 $60 $40 $20 $-

Direct per capita cost

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Indirect per capita cost

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The likelihood an organisation will have a data breach Companies are far more likely to have a small data breach than a mega breach. For the first time our research provides an analysis of the likelihood of one or more data breach occurrences in the next 24 months. Based on the experiences of organisations in our research, we believe we can predict the probability of a data breach based on two factors: how many records were lost or stolen and the industry. Figure 16 shows the subjective probabilities of breach incidents involving a minimum of 10,000 to 8 100,000 compromised records. As can be seen, the likelihood of data breach steadily decreases as the size increases. While the likelihood of a data breach involving a minimum of 10,000 records is estimated at almost 18 percent over a 24-month period, the chances of a data breach involving a 100,000 records is less than one percent. Figure 16. Likelihood of data breach in the next 24 months Projected over the next 24 months

0.200

0.178

0.180 0.160 0.127

0.140 0.120

0.085

0.100 0.080

0.072 0.056

0.060

0.045 0.029

0.040 0.020

0.015

0.011

80,000

90,000 100,000

0.006

0.000 10,000

20,000

30,000

40,000

50,000

60,000

70,000

Likelihood of data breach in the next 24 months

8

Estimated probabilities were captured from sample respondents using a point estimation technique . Key individuals such as the CISO or CPO who participated in cost assessment interviews provided their estimate of data breach likelihood for 10 levels of data breach incidents (ranging from 10,000 to 100,000 lost or stolen records). The time scale used in this estimation task was the forthcoming 24-month period. An aggregated probability distribution was extrapolated for each one of the 61 participating companies.

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Retail and financial sector companies are more likely to have a data breach. Figure 17 summarizes the probability of a data breach involving a minimum of 10,000 records for 11 industry sectors. While a small sample size prevents us from generalizing industry differences, the estimated likelihood of a material data breach varies considerably across industries. Retail and financial sector companies have the highest estimated probability of occurrence. One possible explanation is the amount of confidential and sensitive information collected by these industries. Transportation, energy and industrial companies have the lowest probability of occurrence. Figure 17. Probability of data breach involving a minimum of 10,000 records by industry Projected over the next 24 months

0.213

Retail Financial

0.204 0.199

Public

0.189

Services Hospitality

0.176 0.168

Consumer Communications

0.162

Technology

0.151 0.145

Industrial Energy

0.117 0.09

Transportation 0

0.05

0.1

0.15

0.2

0.25

Probability of data breach involving 10,000 or more records within the next 24 months

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Recommendations on how to mitigate the risk and consequences of data breach Companies participating in our annual study continue to report an increase in both the average total cost and per capita cost of data breach. The most profitable investments as evidenced by the lower cost of a data breach are establishing a strong security posture, incident response planning, business continuity management and the appointment of a CISO with enterprise-wide responsibility. We hope this study helps to understand what the potential costs of a data breach could be based upon certain characteristics and how best to allocate resources to the prevention, detection and resolution of a data breach. The study reveals the severe financial consequences from malicious or criminal acts. These data breaches can prove to be the most costly. In addition to measuring specific cost activities relating to the leakage of personal information, we report in Table 2 the preventive measures taken after the data breach. The most popular steps are: the expanded use of encryption (48 percent), training and awareness programs (43 percent) and additional manual controls (41 percent). In this year’s study, the use of certain measures and controls changed significantly. The adoption of endpoint security solutions increased 5 percent. Strengthening perimeter controls decreased significantly by 9 percent. Table 2 Preventive measures and controls implemented after the data breach Expanded use of encryption Additional manual procedures and controls Training and awareness programs Strengthening of perimeter controls Identity and access management solutions Other system control practices Endpoint security solutions Security intelligence solutions Data loss prevention (DLP) solutions Security certification or audit

2010 40%

2011 43%

2012 46%

2013 48%

2014 48%

56% 52% 27%

55% 46% 30%

47% 44% 33%

46% 40% 35%

41% 43% 26%

23% 24% 10% 11% 15% 13%

19% 21% 16% 15% 16% 12%

23% 25% 19% 18% 15% 10%

27% 26% 25% 23% 21% 18%

22% 23% 30% 19% 18% 21%

*Please note that a company may be implementing more than one preventive measure.

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Cost changes of data breach categories over time Since first conducting this research there have been minimum shifts in spending on data breaches. The most notable changes are decreases in investments in outbound contact costs and increases in the cost to stop customer churn. Table 3 provides the percentage changes for 11 cost categories over four years. The two highest cost categories pertain to investigation and forensics and lost customer business. Table 3 Cost changes over five years

2010

2011

2012

2013

2014

Investigations & forensics

26%

27%

28%

32%

31%

Audit and consulting services

11%

10%

9%

8%

5%

Outbound contact costs

10%

12%

12%

11%

7%

Inbound contact costs

9%

8%

7%

7%

6%

Public relations/communications

3%

3%

2%

0%

2%

Legal services - defence

4%

3%

5%

9%

8%

Legal services - compliance

6%

5%

4%

5%

4%

Free or discounted services

1%

1%

1%

0%

1%

Identity protection services

0%

0%

0%

0%

1%

22%

22%

22%

20%

25%

8%

9%

10%

8%

10%

Lost customer business Customer acquisition cost

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Part 3. How we calculate the cost of a data breach To calculate the cost of data breach, we use a costing methodology called activity-based costing (ABC). This methodology identifies activities and assigns a cost according to use. Companies participating in this benchmark research are asked to estimate the cost for all the activities they engage in to resolve the data breach. Typical activities for discovery and the immediate response to the data breach include the following:

     

Investigations and forensics to determine the root cause of the data breach Determining the probable victims of the data breach Organizing the incident response team Conducting communication and public relations outreach Preparing notice documents and other required disclosures to data breach victims and regulators Implementing call center procedures and specialized training

The following are typical activities conducted in the aftermath of discovering a data breach:       

Audit and consulting services Legal services for defense Legal services for compliance Free or discounted services to victims of the breach Identity protection services Lost customer business based on calculating customer churn or turnover Customer acquisition and loyalty program costs

Once the company estimates a cost range for these activities, we categorize the costs into the three cost centers. Companies participating in the research were asked to estimate a cost range to capture estimates of direct cost, indirect cost and opportunity cost, defined as follows: 

Direct cost – the direct expense outlay to accomplish a given activity.



Indirect cost – the amount of time, effort and other organisational resources spent, but not as a direct cash outlay.



Opportunity cost – the cost resulting from lost business opportunities as a consequence of negative reputation effects after the breach has been reported to victims (and publicly revealed to the media).

To maintain complete confidentiality, the benchmark instrument did not capture any companyspecific information. Subject materials contained no tracking codes or other methods that could link responses to participating companies. To keep the benchmarking process to a manageable size, we carefully limited items to only those cost activity centres that we considered crucial to data breach cost measurement. Based upon discussions with learned experts, the final set of items included a fixed set of cost activities. Upon collection of the benchmark information, each instrument was re-examined carefully for consistency and completeness.

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

Detection or discovery: Activities that enable a company to reasonably detect the breach of personal data either at risk (in storage) or in motion.

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Escalation: Activities necessary to report the breach of protected information to appropriate personnel within a specified time period.

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Notification: Activities that enable the company to notify data subjects with a letter, outbound telephone call, e-mail or general notice that personal information was lost or stolen.

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Ex-poste response: Activities to help victims of a breach communicate with the company to ask additional questions or obtain recommendations in order to minimize potential harms. Redress activities also include ex-poste response such as credit report monitoring or the reissuing of a new account (or credit card).

In addition to the above process-related activities, most companies experience opportunity costs associated with the breach incident, which results from diminished trust or confidence by present and future customers. Accordingly, our Institute’s research shows that the negative publicity associated with a data breach incident causes reputation effects that may result in abnormal turnover or churn rates as well as a diminished rate for new customer acquisitions. To extrapolate these opportunity costs, we use a cost estimation method that relies on the “lifetime value” of an average customer as defined for each participating company. 

Turnover of existing customers: The estimated number of customers who will most likely terminate their relationship as a result of the breach incident. The incremental loss is abnormal turnover attributable to the breach incident. This number is an annual percentage, which is based on estimates provided by management during the benchmark interview 9 process.

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Diminished customer acquisition: The estimated number of target customers who will not have a relationship with the company as a consequence of the breach. This number is provided as an annual percentage.

We acknowledge that the loss of non-customer data, such as employee records, may not impact 10 an company’s churn or turnover. In these cases, we would expect the business cost category to be lower when data breaches do not involve customer or consumer data (including payment transactional information).

9

In several instances, turnover is partial, wherein breach victims still continued their relationship with the breached company, but the volume of customer activity actually declines. This partial decline is especially salient in certain industries – such as financial services or public sector entities – where termination is costly or economically infeasible. 10

In this study, we consider citizen, patient and student information as customer data.

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Part 4. Organisational characteristics and benchmark methods Figure 18 shows the distribution of benchmark companies by their primary industry classification. In this year’s study, 11 industries are represented. Consumer, financial services, public sector (government), and retail represent the four largest segments. Figure 18. Distribution of the benchmark sample by industry segment 4%

5%

Consumer

14%

Financial

4%

Public

4%

Retail 4%

14%

Services Industrial

9%

Communications Energy 14% 14%

Hospitality Technology

14%

Transportation

All participating organisations experienced one or more data breach incidents sometime over the past year. Our benchmark instrument captured descriptive information from IT, compliance and information security practitioners about the full cost impact of a breach involving the loss or theft of customer or consumer information. It also required these practitioners to estimate opportunity costs associated with program activities. Estimated data breach cost components were captured on a rating form. In most cases, the researcher conducted follow-up interviews to obtain additional facts, including estimated abnormal churn rates that resulted from the company’s most recent breach event involving 1,000 11 or more compromised records. Data collection methods did not include actual accounting information, but instead relied upon a numerical estimation based upon the knowledge and experience of each participant. Within each category, cost estimation was a two-stage process. First, the benchmark instrument required individuals to rate direct cost estimates for each cost category by marking a range variable defined in the following number line format.

11

Our sampling criteria only included companies experiencing a data breach between 1,000 and 100,000 lost or stolen records sometime during the past 12 months. We excluded catastrophic data breach incidents to avoid skewing overall sample findings.

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How to use the number line: The number line provided under each data breach cost category is one way to obtain your best estimate for the sum of cash outlays, labour and overhead incurred. Please mark only one point somewhere between the lower and upper limits set above. You can reset the lower and upper limits of the number line at any time during the interview process. Post your estimate of direct costs here for [presented cost category] LL

______________________________________|___________________________________

UL

The numerical value obtained from the number line rather than a point estimate for each presented cost category preserved confidentiality and ensured a higher response rate. The benchmark instrument also required practitioners to provide a second estimate for indirect and opportunity costs, separately. The scope of data breach cost items contained within our benchmark instrument is limited to known cost categories that are applied to a broad set of business operations that handle personal information. We believe a study focused on business process – and not data protection or privacy compliance activities – yields a better quality of results.

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Limitations Our study utilises a confidential and proprietary benchmark method that has been successfully deployed in earlier research. However, there are inherent limitations with this benchmark research that need to be carefully considered before drawing conclusions from findings. 

Non-statistical results: Our study draws upon a representative, non-statistical sample of Australian-based entities experiencing a breach involving the loss or theft of customer or consumer records during the past 12 months. Statistical inferences, margins of error and confidence intervals cannot be applied to these data given that our sampling methods are not scientific.

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Non-response: The current findings are based on a small representative sample of benchmarks. Twenty-two companies completed the benchmark process. Non-response bias was not tested so it is always possible companies that did not participate are substantially different in terms of underlying data breach cost.

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Sampling-frame bias: Because our sampling frame is judgmental, the quality of results is influenced by the degree to which the frame is representative of the population of companies being studied. It is our belief that the current sampling frame is biased toward companies with more mature privacy or information security programs.

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Company-specific information: The benchmark information is sensitive and confidential. Thus, the current instrument does not capture company-identifying information. It also allows individuals to use categorical response variables to disclose demographic information about the company and industry category.

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Unmeasured factors: To keep the interview script concise and focused, we decided to omit other important variables from our analyses such as leading trends and company characteristics. The extent to which omitted variables might explain benchmark results cannot be determined.

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Extrapolated cost results. The quality of benchmark research is based on the integrity of confidential responses provided by respondents in participating companies. While certain checks and balances can be incorporated into the benchmark process, there is always the possibility that respondents did not provide accurate or truthful responses. In addition, the use of cost extrapolation methods rather than actual cost data may inadvertently introduce bias and inaccuracies.

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Appendix 1: Cost for 22 Data Breach Case Studies

Cases 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

Size of breach 13,136 25,980 15,465 22,497 17,172 13,127 9,320 17,628 27,944 28,747 39,050 56,923 13,155 20,049 13,802 15,760 13,729 34,494 12,234 5,631 9,455 16,310

Detection & escalation 416,952 1,166,486 990,969 1,010,217 731,500 608,483 453,920 1,690,880 1,493,068 1,057,442 1,545,990 3,421,879 687,250 1,227,724 1,430,171 784,775 773,897 998,336 1,311,636 262,193 784,803 723,463

Notification 27,111 45,791 69,012 55,183 164,872 77,665 43,464 78,494 20,975 29,698 9,856 103,440 53,834 11,147 30,985 92,309 100,130 180,949 33,372 34,678 14,203 22,788

Ex-post response 111,386 732,309 765,365 437,880 503,337 544,318 541,464 384,961 1,061,920 2,025,072 1,001,050 2,868,132 463,047 554,077 623,545 421,359 307,197 1,721,180 932,394 242,192 321,070 1,546,839

Lost business 298,033 574,531 5,816 367,194 6,120 476,421 6,028 132,836 789,092 2,386,127 997,055 2,137,170 646,636 1,463,294 594,758 837,155 766,733 2,394,202 392,448 729,348 818,639 1,817,503

If you have questions or comments about this research report or you would like to obtain additional copies of the document (including permission to quote or reuse this report), please contact by letter, phone call or email: Ponemon Institute LLC Attn: Research Department 2308 US 31 North Traverse City, Michigan 49686 USA 1.800.887.3118 [email protected]

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Ponemon Institute LLC Advancing Responsible Information Management Ponemon Institute is dedicated to independent research and education that advances responsible information and privacy management practices within business and government. Our mission is to conduct high quality, empirical studies on critical issues affecting the management and security of sensitive information about people and organisations. As a member of the Council of American Survey Research Organisations (CASRO), we uphold strict data confidentiality, privacy and ethical research standards. We do not collect any personally identifiable information from individuals (or company identifiable information in our business research). Furthermore, we have strict quality standards to ensure that subjects are not asked extraneous, irrelevant or improper questions.

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