Cybersecurity Risks and Rewards: Measuring Security

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Cybersecurity risks refer to any potential threats to the confidentiality, integrity or availability of an organization’s data and IT systems. Quantifying these risks is an important part of managing them effectively. By assigning measurable values to various cyber risks, organizations can make more informed decisions about security strategies and investments.

Specifically, quantifying cyber risks helps organizations:

  • Understand their risk exposure – What assets are most at risk? Which threats pose the greatest danger? Quantification provides data to analyze.
  • Allocate security resources – With quantitative risk data, organizations can prioritize efforts and spending. More resources can be devoted to higher risks.
  • Measure security program effectiveness – Tracking quantified risk over time shows if security strategies are working.
  • Demonstrate diligence to regulators – Hard risk numbers show robust cybersecurity management, which satisfies legal and compliance requirements.
  • Obtain cyber insurance coverage – Insurers often require a quantitative risk assessment to underwrite policies.

Risk quantification transforms cybersecurity from guesses and gut feelings to data-driven decisions and measurable improvements. It brings accountability, efficiency and insight to managing digital threats. This article explores key methods and strategies for putting a number on cyber risks.

Financial Impact

Cybersecurity risks can have major financial consequences for an organization. One of the most direct costs is dealing with the aftermath of a data breach. The average total cost of a data breach can range from millions to tens of millions of dollars depending on the sensitivity of the data lost and the number of records compromised. These costs include technical investigations, legal expenditures, communications to consumers, and providing monitoring or credit protection services to affected individuals.

Beyond the expenses tied to a specific breach incident, there is also lost revenue that can result from system downtime during an attack. The average cost of network downtime per hour can be estimated between $100,000 to $500,000 depending on the industry. For companies that rely heavily on their online presence and e-commerce activity, each minute of downtime translates directly into lost sales and damage to brand reputation. Quantifying these potential costs allows an organization to weigh the tradeoffs and make the business case for investing in stronger cyber defenses.

Reputational Damage

A data breach or cyber attack can seriously damage an organization’s reputation, leading to a loss of customer trust and lower brand value. According to the 2022 Cost of a Data Breach Report by IBM, the average data breach results in $4.35 million in damages to brand reputation.

When customers’ personal information is compromised in a breach, they lose confidence that the organization can keep their data safe. A survey by KPMG found that 41% of consumers would likely not do business with an organization that experienced a data breach where financial information was stolen. This loss of trust is difficult to regain and can impact customer retention and acquisition for years after an incident.

Brand value also declines when an organization experiences a cyberattack. The IBM report found that organizations’ brand values decreased by an average of 5.6% following a breach. Cyberattacks signal to customers that an organization does not have adequate security controls and protections in place. This reflects poorly on the brand and undermines competitive positioning.

Overall, even if financial losses from a breach are minimal, the harm to reputation and brand can be severe and long-lasting. Organizations must account for these intangible damages when assessing cyber risks and prioritizing security programs. Proactive investments to prevent incidents are crucial for protecting customer trust and brand equity.

Operational Disruption

Cyber attacks can severely disrupt normal business operations in many ways, including:

Business process interruption – Malware infections, network outages, and systems unavailability can interrupt critical business workflows and processes. Manufacturers may be unable to run production lines, retailers may be unable to process orders, and healthcare providers may be unable to access patient records, delaying time-sensitive operations. Remediation and recovery efforts also consume significant time and resources.

Productivity declines – With systems offline, employees are often unable to work productively. Workarounds are typically slower, more manual, and prone to error. Employees may waste time unable to access files, applications, or databases central to their work. Technical support resources are strained assisting impacted users. Lost productivity and opportunities add up over time.

A major component of cyber risk is the potential legal and regulatory costs that can result from security incidents. Organizations that suffer data breaches or other cyber incidents often face substantial fines and penalties for non-compliance with data security laws and regulations.

  • The most well known example is the European Union’s General Data Protection Regulation (GDPR), which can impose fines of up to 4% of global annual revenue for violations. Major companies like British Airways and Marriott have been fined tens of millions of euros for GDPR non-compliance after data breaches.
  • In the United States, regulated sectors like healthcare and finance face stringent data security requirements under laws like HIPAA and GLBA. Penalties for violations can reach millions of dollars. Equifax was fined $700 million for its 2017 breach, the largest ever fine issued by the U.S. Consumer Financial Protection Bureau.
  • Beyond fines, companies often face expensive lawsuit settlements after cyber incidents. Class action lawsuits in particular can cost tens or hundreds of millions of dollars to settle. The 2013 Target data breach resulted in an $18.5 million settlement, while the 2017 Equifax breach settlement cost the company $700 million.

The potential legal and regulatory costs of a cyber incident can be substantial, so quantifying these potential liabilities is an important part of measuring cyber risk. Fines, lawsuits and legal expenses should all factor into a comprehensive assessment. Proper cyber security controls and compliance procedures can help reduce regulatory and litigation risks.

Competitive Harm

Cyber security breaches can significantly undermine an organization’s competitive position in the marketplace. Loss of intellectual property, proprietary data, and trade secrets to hackers and cyberspies can erode a company’s competitive advantages. R&D investments may be compromised if product designs, formulas, or sensitive plans are stolen.

Additionally, cyber attacks that cripple operations and service delivery can cause customers to lose trust and take their business elsewhere. Competitors who avoid disruptions may be able to capitalize by stealing away customers and contracts.

Missed opportunities are another consideration. Companies focused on recovering from an attack may be unable to effectively pursue new initiatives and innovations. Competitors who aren’t hampered by cyber incidents could gain first-mover advantage and make key technological breakthroughs.

Overall, cyber risk poses a serious threat to competitive standing. Quantifying the potential loss of customers, intellectual property, and missed market opportunities is important for understanding the full business impact. Companies that fail to adequately manage cyber risk could slowly but surely lose their competitive edge.

Third-Party Risks

A significant cybersecurity risk comes from outside entities that a company interacts with, such as vendors, suppliers, business partners, and customers. A company’s cybersecurity posture is only as strong as its weakest link. Third parties that have access to a company’s systems, data, and intellectual property can expose the company to security breaches.

Supply chain vulnerabilities – The supply chain is a major cyber risk, as compromised hardware or software components can provide a backdoor for attackers. Vendors that are hacked can unwittingly pass malware onto their customers. Strong vendor security assessments and controls are essential.

Partner data exposures – Business partners often have access to sensitive data for business purposes. A partner’s poor security can lead to exposures of shared data assets. Companies need visibility into how partners store data, control access, train employees on security, and handle security incidents. Data sharing agreements must have security requirements.

Third-party cyber risks expand a company’s attack surface. To manage external risks, companies should have robust vendor management programs, conduct due diligence on partners, limit data sharing, and monitor for suspicious third-party activity. Cyber insurance and contractual protections also help mitigate third-party exposures.

Insurance Costs

Cyber insurance has become an increasingly important tool for managing cyber risk. However, as attacks become more frequent and severe, cyber insurance is getting more expensive and difficult to obtain.

Insurance companies have been raising premiums, in some cases several times higher than just a few years ago. Many insurers are declining coverage for certain types of businesses or no longer covering certain types of cyber events. For example, some insurers will not cover businesses with poor security controls or will exclude coverage for damages from a network breach.

The rising cost of cyber insurance translates into higher expenses for organizations. Those that cannot obtain sufficient coverage face greater financial exposure from cyber incidents. Organizations need to factor in these insurance trends when quantifying their cyber risks.

Security Spending

Cybersecurity spending is a significant and growing cost for many organizations. This includes both technology costs for security tools and services, as well as staffing costs for in-house cybersecurity professionals and managed security providers.

On the technology side, many organizations invest in next-generation firewalls, antivirus/antimalware tools, intrusion detection/prevention systems, data loss prevention, encryption, multi-factor authentication, security information and event management (SIEM), vulnerability scanners, email filters, and other security controls. These can range from a few thousand dollars for a basic setup to millions for large enterprises with significant infrastructure to protect. Cloud-based security services have also become a major spending category.

For staffing, larger organizations may have dozens of cybersecurity professionals on staff encompassing roles like CISO, security architects, security analysts, incident response teams, and more. Salaries for top cybersecurity talent can reach well into the six figures. Even small businesses may dedicate one or more full-time IT staffers to security matters. Outsourcing cybersecurity roles to managed security providers has also grown as an alternative to hiring.

Overall cybersecurity spending averaged 13% of IT budgets for organizations in 2021 according to various surveys and is projected to grow further as threats escalate. While costly, appropriate security investments are essential to manage risk. Organizations must strike the right balance between protection costs and risk exposure based on their unique needs and vulnerabilities.

Conclusion

Quantifying cyber security risks is critical for organizations to make strategic decisions and justify security investments. By understanding the financial, reputational, operational, legal, competitive, third-party, and insurance impacts of cyber incidents, organizations can determine where to focus their efforts and resources.

While some risk factors are challenging to quantify precisely, organizations can still model potential scenarios and impacts. Approaches like calculating the financial loss from downtime, estimating legal and regulatory costs, and evaluating brand damage allow organizations to put a dollar figure on cyber risks. Qualitative assessments also provide valuable perspective on less tangible risks.

With data-driven risk quantification, organizations can identify their greatest vulnerabilities, prioritize security projects, and balance security spending with overall business objectives. Quantification also supports approval and budgeting for vital security programs. Rather than relying on fear, uncertainty, and doubt, organizations can make cyber security a strategic business function focused on risk management. Accurately scoping and scaling the real costs of cyber incidents allows organizations to build cyber resilience and limit their exposure.