Data Breach Costs Rose Significantly In 2008, Ponemon Study Says

The cost of data breaches is on the rise, and businesses that experience them are losing customers as a result, according to a new study issued today.

In an an update to its popular annual "U.S. Cost of a Data Breach Study," Ponemon Institute and PGP have published a new report that indicates many of the cost factors surrounding security incidents have risen in the past 12 months.

"After four years of conducting this study, one thing remains constant: U.S. businesses continue to pay dearly for having a data breach," says Larry Ponemon, chairman and founder of The Ponemon Institute. "As costs only continue to rise, companies must remain on guard or face losing valuable customers in this unpredictable economy."

The average cost of a data breach in 2008 grew to $202 per record compromised, an increase of 2.5 percent since 2007 ($197 per record) and 11 percent compared to 2006 ($182 per record), according to the study. The average total cost per reporting company was more than $6.6 million per breach -- up from $6.3 million in 2007 and $4.7 million in 2006 -- and ranged from $613,000 to almost $32 million.

The cost of lost business continued to be the most costly effect of a breach, averaging $4.59 million, or $139 per record compromised, the study says. Lost business now accounts for 69 percent of data breach costs, up from 65 percent in 2007, compared to 54 percent in the 2006 study. In 2008, the average abnormal customer churn rate resulting from a data breach was 3.6 percent, an increase from 2.67 in 2007 and 2.01 percent in 2006. Between 2005 and 2008, this one cost component grew by more than $64 on a per victim basis -- a 38 percent increase, the study says.

"The cost of customer churn is the largest cost," Ponemon says. "Yet many organizations fail to consider or measure this important economic loss."

Healthcare and financial service companies have the highest average rate of churn -- 6.5 percent and 5.5 percent, respectively, according to the study. "High churn rates reflect the fact that these industries manage and collect consumers' most sensitive data," it says. The average cost of a healthcare breach ($282 per record) is more than twice that of an average retail breach ($131).

More than 88 percent of all breaches in 2008 involved incidents resulting from insider negligence, according to the study. The cost of these incidents is lower than the cost of malicious attacks: Per-victim cost for data breaches involving negligence was $199 per record, compared to $225 per record for malicious acts.

Breaches by third-party organizations -- such as outsourcers, contractors, consultants, and business partners -- were reported by 44 percent of respondents, up from 40 percent in 2007, 29 percent in 2006, and 21 percent in 2005. Per-victim cost for third-party incidents is $52 higher -- $231 vs. $179 -- than insider-caused breaches, the study says.

Data breaches experienced by "first timers" are more expensive than those experienced by organizations that have had previous data breaches, according to the report. Per-victim cost for a first time data breach is $243 vs. $192 for experienced companies, Ponemon says. More than 84 percent of all cases in this year's study involved organizations that had experienced more than one major data breach.

Despite their experiences, however, most companies still don't plan financially for data breaches. "Most companies don't budget -- or self-insure -- for the breach," Ponemon says. "Direct and indirect costs are normally absorbed by various individual budgets, including IT, IT security, corporate communications, legal, compliance and others." Have a comment on this story? Please click "Discuss" below. If you'd like to contact Dark Reading's editors directly, send us a message