In Today’s World, Reputations Hinge on Information Security

Two recent high-profile data breaches — at Sony Corp. and U.S. marketing firm Epsilon — have once again highlighted the critical importance of information security. Each of these incidents was referred to as the largest and/ or worst information leak in history and affected millions of people, if not hundreds of millions.

Experts say security breaches are escalating, and that the challenges for companies in terms of ensuring the safety of customer data will only increase. The trend is being driven by the decreasing level of computer skills required to “hack,” as well as the increasing popularity of cloud computing, social media and mobile computing and the increased interconnectedness of devices.

Soon, there will be over 2 billion people connected to the Internet. At the same time, in addition to the ever-expanding variety of digital devices, we are beginning to see the networked interconnection of everyday objects — often referred to as the “Internet of Things” — with about 35 billion devices (including medical gadgets such as pacemakers, as well as vehicles, furniture and even clothes) connected today. Forecasts suggest that number will grow to trillions in the near future.

One can only hope that all companies, both large and small, are re-examining the systems they have in place for ensuring their customers’ privacy and information security. The risks of not doing so are huge.

From a financial viewpoint, one study by Ponemon Institute LLC, a privacy and information management research firm, estimated that the average total per-incident cost for a breach in 2009 was $6.75 million. That takes into account a wide range of cost factors: detection, notification and response as well as legal, investigative and administrative expenses, customer defections, opportunity loss, reputation management, and customer support costs such as information hot lines and credit card monitoring subscriptions. The most expensive data breach event reported cost a company nearly $31 million to resolve, while the lowest total cost for a company was $750,000.

From a reputational viewpoint, studies show that 20% or more of customers who receive notifications about a security breach will terminate their relationship with that company, while another 40% will “think about” terminating their relationship. Over half of respondents claim a breach decreases their sense of trust and confidence in the organization reporting the incident.

It would be difficult to say which is worse — the financial or reputational impact of a security breach. However, companies that have had information security issues, regardless of the reasons, have suffered greatly in terms of their credibility with customers, and indeed their entire stakeholder universe (i.e. potential customers and the general public, suppliers, government, investors, etc.).

Certainly for a marketing perspective, because of the reputational risk, information security should be an imperative for any company that happens to handle its customers’ personal data in any form. Information security is something that consumers have rightfully come to expect and demand considering today’s increasingly tech-dependant lifestyles.

Companies that place a high priority on carefully handling the valuable and sensitive data with which they have been entrusted — including proactively instituting “best practices and beyond,” conducting privacy audits and providing rigorous awareness training for all employees — will definitely have an edge in the long term over firms that place their priorities elsewhere.

Debbie Howard is Chairman of CarterJMRN and President Emeritus of the American Chamber of Commerce in Japan.

Originally Published in Nikkei Weekly, 8th August 20011

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