Cost of data breaches falls for first time in seven years

Data breaches caused by malicious attacks add to the cost of doing business -- but not as much as they used to, a study finds

The average organizational cost of data breaches has decreased for the first time in seven years, according to a study released by Symantec and the Ponemon Institute on Tuesday.

In 2011 the average cost of a data breach was US$5.5 million, 24 percent less than in 2010, according to the 2011 edition of the annual "U.S. Cost of a Data Breach" study. The cost per compromised record has also decreased, by 10 percent, and stands at $194.

The study's results are based on information collected from 49 U.S. companies spanning 14 industry sectors that experienced data breaches last year.

Catastrophic data breaches resulting in over 100,000 compromised records have been excluded from the study because they could have skewed the results, said Larry Ponemon, the chairman and founder of the Ponemon Institute.

The most important category from a cost perspective is that of so-called "lost business" costs. This includes abnormal turnover of customers, increased customer acquisition activities, reputation losses, as well as diminished goodwill. The costs that fall into this category have decreased by 34 percent compared to 2010, Ponemon said.

Fewer customers are now abandoning companies after data breaches, reducing "churn" -- the replacement of a departing customer by a new one -- and the costs associated with that, according to the report.

Customer churn levels differ from one industry sector to another, with financial services and healthcare organizations being susceptible to a higher churn.

Companies that suffer data breaches as a result of malicious attacks usually experience higher costs -- $222 per record compared to the average of $194. The number of data breaches resulting from malicious attacks has also increased and now accounts for 37 percent of the total, 6 percent points higher than in 2010.

The reason why companies that experience a malicious attack suffer higher data breach costs is because they need to do more things after the fact, Ponemon said. "It's harder to do the forensics and understand what the issues are." The customer churn rate experienced by such companies is also slightly higher.

The most common type of malicious attack associated with data breaches is malware infection, and is seen in half of all incidents. This is followed by malicious insider actions, which occur in 33 percent of data breach cases.

One cause for the decrease of data breach costs is companies stepping up their notification and response processes as a result of increased regulatory action, Ponemon said.

However, the study found that rushing these processes can actually result in higher costs. Quick notifications and rapid responses can cost organizations $33 more per compromised record than on average.

Companies need to spend more time doing forensics and discovery to make sure they understand which consumers are at risk, said Robert Hamilton, Symantec's senior manager of product marketing for enterprise security. Failing to accurately determine the number of affected individuals can result in notifying more people than necessary, which can lead to higher churn and other cost-increasing factors.

"The key is balance. You want to be timely and not take forever to report the breach, but you also want to be accurate," Hamilton said. However, this type of process could conflict with future European data protection regulations that might require companies to disclose data breaches within 24 hours of their discovery.

It's not reasonable to expect a good quality notification in 24 hours and it might actually be more harmful to the public, because the information will be less accurate, Hamilton said. "Ultimately people want an accurate disclosure, but it shouldn't take forever. It shouldn't take months, but days or weeks."

The study also found that organizations experience lower costs if they have a chief information security officer (CISO) or can afford to hire outside consultants to assist with the data breach response. Such companies are generally better-prepared to deal with data breaches, Ponemon said.

Avoiding data breaches requires the proper identification and classification of confidential information inside the organization, the education of employees regarding information protection policies, the deployment of data loss prevention technologies and the enforcement of strict access controls and authentication, Hamilton said.

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