Data Breaches' Costly Fallout

Data breaches are no longer rare events. In recent high-profile breaches, Vodafone Australia made millions of customers' names, addresses, credit card information, and driver's license numbers freely available; the Sony PlayStation Network compromised 77 million users' personal data; and the hack of email marketer Epsilon exposed customer data from Citibank, Disney, Best Buy, Kroger and other companies.

Data security is often considered an IT problem. But the enormous costs and far-ranging consequences of a breach are enterprisewide concerns. Breaches are expensive, requiring extra staff, external legal counsel, credit monitoring services for victims, and more. The Ponemon Institute reported that the average cost of a breach was $7.2 million in 2010, or $214 per compromised customer record.

Although frequently overlooked, indirect costs of breaches are often higher than direct costs. Indirect costs come in many forms, including these:

Staff. Data breaches get management's full attention, often resulting in staff reassignments and delays on other projects. Breaches also distract employees, particularly when their data has been compromised. Overall, IT productivity declines.

Public relations. After a breach, angry, fearful customers desperately seek information and reassurance. Companies try to control the damage by issuing press releases or setting up special call centers, social networks and other forums. But few customers defect even if they're unhappy. The bar is low: You only have to be as good as the competition.

Finger-pointing. Many companies want a scapegoat. During one company's server center renovation, a tape containing customer data disappeared. Security videos suggested that a construction worker might have hidden it in his toolbox. But the vice president responsible for renovations blamed the CIO. The CIO's counterattack implicated improperly screened workers. When other executives joined the fray, the CEO fired the CIO so the organization could return to business as usual.

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