[Chapter 2] 2.3 Cost-Benefit Analysis
Author: Simson Garfinkel & Gene Spafford
Date: 1999-02-03T23:59:05Z

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| Chapter 2 Policies and Guidelines |

## 2.3 Cost-Benefit Analysis

After you complete your risk assessment, you need to assign a cost to each risk, and determine the cost of defending against it. This is called a cost-benefit analysis.

### 2.3.1 The Cost of Loss

Computing costs can be very difficult. A simple cost calculation can simply take into account the cost of repairing or replacing a particular item. A more sophisticated cost calculation can consider the cost of having equipment out of service, the cost of added training, the cost of additional procedures resulting from a loss, the cost to a company's reputation, and even the cost to a company's clients. Generally speaking, including more factors in your cost calculation will increase your effort, but will also increase the accuracy of your calculations.

For most purposes, you do not need to assign an exact value to each possible risk. Normally, assigning a cost range to each item is sufficient. For instance, the loss of a dozen blank diskettes may be classed as "under $500," while a destructive fire in your computer room might be classed as "over $1,000,000." Some items may actually fall into the category "irreparable/irreplaceable;" this could include loss of your entire accounts-due database, or the death of a key employee.

You may want to assign these costs based on a finer scale of loss than simply "lost/not lost." For instance, you might want to assign separate costs for each of the following categories (these are not in rank order):

- Non-availability over a short term (< 7-10 days)

- Non-availability over a medium term (1-2 weeks)

- Non-availability over a long term (more than 2 weeks)

- Permanent loss or destruction

- Accidental partial loss or damage

- Deliberate partial loss or damage

- Unauthorized disclosure within the organization

- Unauthorized disclosure to some outsiders

- Unauthorized full disclosure to outsiders, competitors, and the press

- Replacement or recovery cost

### 2.3.2 The Cost of Prevention

Finally, you need to calculate the cost of preventing each kind of loss.

For instance, the cost to recover from a momentary power failure is probably only that of personnel "downtime" and the time necessary to reboot. However, the cost of prevention may be that of buying and installing a UPS system.

Costs need to be amortized over the expected lifetime of your approaches, as appropriate. Deriving these costs may reveal secondary costs and credits that should also be factored in. For instance, installing a better fire-suppression system may result in a yearly decrease in your fire insurance premiums and give you a tax benefit for capital depreciation. But spending money on a fire-suppression system means that the money is not available for other purposes, such as increased employee training, or even investing.t

### 2.3.3 Adding Up the Numbers

At the conclusion of this exercise, you should have a multi-dimensional matrix consisting of assets, risks, and possible losses. For each loss, you should know its probability, the predicted loss, and the amount of money required to defend against the loss. If you are very precise, you will also have a probability that your defense will prove inadequate.

The process of determining if each defense should or should not be employed is now straightforward. You do this by multiplying each expected loss by the probability of its occurring as a result of each threat. Sort these in descending order, and compare each cost of occurrence to its cost of defense.

This comparison results in a prioritized list of things you should address. The list may be surprising. Your goal should be to avoid expensive, probable losses, before worrying about less likely, low-damage threats. In many environments, fire and loss of key personnel are much more likely to occur and more damaging than a virus or break-in over the network. Surprisingly, however, it is break-ins and viruses that seem to occupy the attention and budget of most managers. This practice is simply not cost effective, nor does it provide the highest levels of trust in your overall system.

To figure out what you should do, take the figures that you have gathered for avoidance and recovery to determine how best to address your high-priority items. The way to do this is to add the cost of recovery to the expected average loss, and multiply that by the probability of occurrence. Then, compare the final product with the yearly cost of avoidance. If the cost of avoidance is lower than the risk you are defending against, you would be advised to invest in the avoidance strategy if you have sufficient financial resources. If the cost of avoidance is higher than the risk that you are defending against, then consider doing nothing until after other threats have been dealt with.[5]

> [5] Alternatively, you may wish to reconsider your costs.

### 2.3.4 Convincing Management

Security is not free. The more elaborate your security measures become, the more expensive they become. Systems that are more secure may also be more difficult to use, although this need not always be the case.[6] Security can also get in the way of "power users," who wish to exercise many difficult and sometimes dangerous operations without authentication or accountability. Some of these power users can be politically powerful within your organization.

> [6] The converse is also not true. PC operating systems are not secure, even though some are difficult to use.

After you have completed your risk assessment and cost-benefit analysis, you will need to convince your organization's management of the need to act upon the information. Normally, you would formulate a policy that is then officially adopted. Frequently, this process is an uphill battle. Fortunately, it does not have to be.

The goal of risk assessment and cost-benefit analysis is to prioritize your actions and spending on security. If your business plan is such that you should not have an uninsured risk of more than $10,000 per year, you can use your risk analysis to determine what needs to be spent to achieve this goal. Your analysis can also be a guide as to what to do first, then second, and can identify which things you should relegate to later years.

Another benefit of risk assessment is that it helps to justify to management that you need additional resources for security. Most managers and directors know little about computers, but they do understand risk and cost/benefit analyses.[7] If you can show that your organization is currently facing an exposure to risk that could total $20,000,000 per year (add up all the expected losses plus recovery costs for what is currently in place), then this estimate might help convince management to fund some additional personnel and resources.

> [7] In like manner, few computer security personnel seem to understand risk analysis techniques.

On the other hand, going to management with a vague "We're really likely to see several break-ins on the Internet after the next CERT announcement" is unlikely to produce anything other than a mild concern (if that).

2.2 Risk Assessment |  | 2.4 Policy