Category Archives: Risk Management

Ponemon Cost of Breach Report Released

According to the latest Ponemon COB report, data breach attacks have doubled this past year while the average cost of a data breach has increased to $204 per compromised record.  The Ponemon Institute looked at several variables when determining this $204 number, including:  lost business; legal fees; disclosure expenses; consulting help, including forensics; and remediation expenses such as improved technology and training.  Page 16 of the report indicates that lost business is the most significant component of this number – representing $135 of the $204 amount.   In other words, those firms disclosing to the Ponemon Institute information regarding their breach have had a signficant documented loss of business.  In addition to providing this valuable insight regarding brand damage caused by a breach, the report is also instructive given it offers information regarding the causes of 2009 breaches. 

According to this Ponemon Insitute report, data breaches generally have three primary causes:   third party negligence; malicious attacks such as coordinated botnet attacks; and negligent insider behavior.  In fact, the Ponemon Institute points out that 42 percent of all cases in the study involved third-party negligence.  Although this overall number (as well information in the report) is based on information provided by only 45 businesses  willing to speak in detail with the Ponemon Institute, the number should not be taken lightly – especially since it is not that far off from numerous other studies and surveys done over the years. 

The two lessons here – breaches lead to lost business and third-party negligence is a signficant cause of breaches – actually have more to do with marketing then with risk management.  In a prolonged down economy, small and middle market companies need to differentiate by showcasing their network security and privacy strengths.  Instead of shying away from the efforts needed to improve your network risk profile, embrace the endeavor by realizing it will only be a matter of time before you are required to do what you are voluntarily doing now.  As with most corporate best practices, being one step ahead of your competition when it comes to network security and privacy can turn into a significant marketing advantage.  Depending on your business goals and what you do to generate revenue, this advantage can easily turn into a sustained  competitive edge.

Is the Billable Hour Really Dead?

Law firms generally bill by charging an hourly rate for their “timekeeper” services.  Billing rates can slide up or down based on the litigation matter or transaction – for example, the pre-packaged rates provided to an insurer for defense work – or by the seniority of the timekeeper – with partners potentially charging hundreds more an hour than associates.  Even paralegals and some non-lawyer staff are charged at an hourly rate. 

There are obviously a few other factors tied to the standard billable hour system:  (1) How many hours are logged; (2) How many hours actually get billed to a client; (3) How many hours actually get paid by the client; and (4) How much in expense is paid by the client.  At its core, however, it’s the annual ritual of increasing billable hourly rates that has caused law firm double-digit growth for so many years.  Our economic troubles these past few years, however, have put a damper on that yearly ritual.

To that end, the press has generously covered any example of a law firm providing an alternative to the billable hour regime – with an eye towards claiming these sorts of arrangements are becoming more and more commonplace.  For example, it is reported that over 10% of Reed Smith’s new engagements involve some form of alternative fee structure while Saul Ewing offers clients flat fees in some insurance, due diligence and employment matters as well as with will preparation and patent filings. According to a March and April 2009 Altman Weil survey of Managing Partners and Chairs at 687 law firms with 50 or more lawyers, 27.9% felt that “more non-hourly billing” was a permanent change in their firm’s strategy. 

High profile lawyers such as Scott Turow have taken the “Kill the Billable” banner – even using his famous writing skills to pen an ABA Journal articleon the topic.  As Mr. Turow puts it, his “greatest concern is not merely that dollars times hours is bad for the lives of lawyers – even though it demonstrably is – but  that it’s worse for clients, bad for the attorney-client relationship, and bad for the image of our profession. Simply put, I have never been at ease with the ethical dilemmas that the dollars-times-hours regime poses, especially for litigators.”

Evan Chesler, head of Cravath, Swaine & Moore, has also very publicly called for the death of the billable hour.   According to Chesler, “[t]he system rewards inefficiency, frustrates clients and has little economic logic.”  Bill Lee, co-managing partner of Wilmer Cutler Pickering Hale and Dorr, offers his opinion in an article published by Corporate Counsel:  “For in-house counsel facing tremendous budgetary pressures, the fixed fee addresses the problems caused by the hourly rate, such as unpredictability, high costs divorced from actual value and, most importantly, the maddening law firm definition of ‘productivity’ — defined as more lawyers and more hours per matter.” 

As the partner in a mid-sized or regional law firm, you are probably wondering why it matters what a Cravath partner has to say.   Just a bit more background.  According to a BTI Consulting survey of 1,700 corporate counsel there is a high correlation between how high a law firm scores on positive brand awareness and its revenues – not too surprising here to find law firms are not that different from other companies when it comes to branding.  In fact, the survey revealed that a “10 percent incremental increase in positive differentiation translates into a 28.5 percent increase in revenue for a typical law firm.”  What is meaningful is what we learn when we drill down a bit further. 

The survey reportedly uncovered that market differentiation was tied to a law firm’s innovation in technology, service and billing.  There is nothing too startling in listing “technology and service” given that most non-law firm businesses are measured by the same yardsticks.   What is important for purposes of this post is the fact that “billing” was considered by legal services buyers to be a marketing attribute that had a direct impact on differentiation and ultimately on a law firm’s revenues.  BTI suggested that “[m[aking aggressive use of alternative billing arrangements (sharing risk, being accountable, etc.)” would assist in such differentiation.  

When is the last time “billing” came up as a possible positive branding metric for a company you admired?  The fact that it came up in the BTI survey as a positive marketing attribute and is now being discussed by large law firm managing partners shows that there is marketing gold in being creative with your billing strategy – no matter what the size of your law firm. 

Law firms need to continually evaluate billing processes that may help to differentiate themselves from their peers.  For example, firms with  implemented billing guidelines will be consistent and more in tune to their clients’ needs.   Unfortunately, according to a survey from leading law firm billing expert, William Ross, 32.7% of polled law firms have little or no guidelines available to their lawyers.

Security MSP Option for Small Business Owners

As pointed out by this article, when it comes to network security, small business owners are often “hampered by a lack of resources, fewer qualified security personnel, less money to buy necessary products, and more difficulties complying with regulations that often were written without companies of their size in mind.”  And, as pointed out in this article, a small business can be more of an attractive target for “spammers, botnet operators, and other attackers than a home user mainly because it has a treasure trove of valuable data without the sufficient IT and security resources to protect it.”  In fact, as reported by Business Week, some small businesses can even become victims of identity theft.

Unfortunately, given the increase in sophisticated attacks made against small business owners, it is becoming more and more difficult for these owners to deploy suitable resources.   One available option today to smaller companies is the “outsourcing” of security to a managed service provider.  MSPs who are focused on security and IT management for small business owners have network security resources and expertise built as their core competency.   Although it may seem to be the last thing a company would want to do, i.e., have another company take ownership over its network security, so long as the MSP is properly vetted and has clear staying power, there is little difference between using a MSP for data security or using a bank for financial security.

Is Privacy Really Dead?

According to this article, Facebook founder Mark Zuckerberg recently said that “privacy was no longer a ‘social norm”’.   This convenient point of view comes less than a month after Facebook changed the way it organizes user information.  Under the old system, people had the option of being  placed into regional networks like “North Jersey”, while the new system removes this distinction so that your information can be visible to any Facebook user and not just those in your network.   

As well, the new “Everyone” setting doesn’t just limit your page to Facebook users – it allows access to everyone on the Internet, including Google , Yahoo! and any other search engine spiders.  In other words, if you use the Facebook default settings – which many new users do – you will end up posting to anyone with online access and you may now also end up on a search engine results page.  LinkedIn has been doing this for years now.  This increase in exposure is obviously the goal behind the recent Facebook changes.  In other words, Facebook will be able to grow it’s user base beyond its already staggering 350 million users.

There is obviously a simple solution:  Limit your visability to those who are friends and curtail what you post on your page that is made visible to non-friends.  Go to this site for detailed information on how to set your Facebook privacy settings.  Privacy is not dead – unless you choose to let it die.

Planning for Disaster

Today is the one year anniversary of the “Miracle on the Hudson” – the day a plane landed in the Hudson River after its engines ate too many geese and shut down.  All of this took place literally shouting distance from New York City’s skyscrapers.  The captain of the plane as well as a group of passengers each wrote a book detailing this amazing story.  

The key takeaway from this event is that planning for disaster – whatever that might be for your business – is not a waste of time.  According to an account reported in his book, Captain “Sully” actually studied beforehand an ocean ditching similar to the one he performed in the Hudson River.

Law Firm Suing Chinese Developers Suffers Attack

Although law firms have been hit with network security attacks over the years and sustained significant losses in the process, it has never been the case that they were targeted simply because they chose the wrong side in a litigation.  That is until now.   According to this report, an exploit took place weeks after “filtering software firm CYBERsitter announced that it had retained Gipson Hoffman & Pancione to sue the Chinese government, two Chinese software developers and seven PC makers for allegedly distributing its software code as part of the Chinese state-sponsored filtering and monitoring program known as Green Dam Youth Escort.” 

There are reports of other attacks that were recently launched against Google and Yahoo! in order to retrieve account information regarding Chinese dissidents.   According to a report in The Economic Times, McAfee has stated that the Google attack exploited an Explorer flaw.   It will be interesting to see how these “China” exploits pan out in the coming weeks.

Data Breaches, Encryption and ICs

In 2009, there were 498 reported breaches involving over 222 million records.   And, of these 498 incidents, only six firms reported that they had deployed encryption or another strong security to  protect the exposed data.   This is not surprising given that most notification laws provide a safe harbor for encrypted data.  In other words, there would not have been a need to report. 

As well, of the reported records impacted by the breaches, 59% could be attributed to the conduct of independent contractors.  Last year, over 45% of all breached records – 16 million – were compromised by the actions of independent contractors. In fact, the Ponemon Institute reports that 29% of all breaches are caused by third-party negligence.   As the year progresses and budgets continue to be squeezed, the due diligence that was once used to vet vendors will unfortunately slip a bit. And, when vendor engagements start favoring pricing over controls, the resulting increase in vendor data loss may prove staggering.

Improving independent contractor due diligence by employing only those small business vendors with sound data protection practices in place will go a long way in improving your risk profile.  Moreover,  in addition to being a sound way to better protect sensitive data, encryption deployment has the added benefit of protecting you from notification laws and resulting lawsuits.  The public notices speak for themselves.

Data Theft by Former Employees

With unemployment now stretching past 10%, the Ponemon Institute “Data Loss Risks During Downsizing” survey conducted last year is more relevant than ever.  This survey found that 59% of employees who leave or are asked to leave a company are stealing proprietary or sensitive corporate data. Moreover, 79% of these respondents admit that their former employer did not permit them to leave with company data. Not surprisingly, 67% of respondents used their former company’s proprietary information to leverage a new job.

Still Looking for Guidance on EHR

Electronic health records (EHR) should be on the risk management fast track.  First, the FTC promulgated regulations that will require most hospitals to implement a written ID theft prevention program by June 2010.  California  and a few other states have already started requiring that healthcare providers implement technical and physical safeguards to protect patient medical information.  And now, Title XIII of the American Recovery and Reinvestment Act of 2009, also known as the Health Information Technology for Economic and Clinical Health Act (the HITECH Act), has its implementing regulations just now starting to change the EHR landscape. Thankfully, the HITECH Act provides significant funding for the development of this nationwide health information technology infrastructure.  Specifically, the law provides financial incentives through the Medicare program to encourage physicians and hospitals to adopt and use certified EHR .

The keys to the EHR kingdom turn on whether you are actually a “meaningful EHR user”.  Although some guidance was provided by a HHS working committee in June 2009, and further guidance in the form of a proposed rule was provided on December 30, 2009, a final rule on the definition has yet to be delivered.

According to the HHS December 30, 2009 Press Release, “The proposed rule would define the term “meaningful EHR user” as an eligible professional or eligible hospital that, during the specified reporting period, demonstrates meaningful use of certified EHR technology in a form and manner consistent with certain objectives and measures presented in the regulation.  These objectives and measures would include use of certified EHR technology in a manner that improves quality, safety, and efficiency of health care delivery, reduces health care disparities, engages patients and families, improves care coordination, improves population and public health, and ensures adequate privacy and security protections for personal health information.”

What exactly does this nested and partially circular definition mean to someone looking for guidance?   Not very much.   Until such time as the term “meaningful EHR user” is finalized, the door remains open as to just how far-reaching the HITECH Act will become.

CIT Group Bankruptcy

Down 38.49% in 2008, the S&P 500 experienced its worst performance in over seven decades.  In 2009, the S&P 500 bounced back and was up 19.67%.  Notworthy S&P news for small business owners, however, is the fact that CIT Group was booted from the index when it filed for bankruptcy – the 5th largest in U.S. history.   CIT was a HUGE lender to small businesses around the country.   As CIT’s marketing materials put it, “For more than 100 years, CIT has provided capital to small business and middle market customers. These sectors continue to play a vital role in the US economy and in overall employment, representing more than 90 million jobs.” 

Although the bankruptcy was a quick “pre-packaged” filing that had little real impact on its day-to-day operations, the impact on small business remains to be seen given the new shareholders of the company will be debtors, i.e., large financial institutions, and the most recent board members have a financial pedigree that favors big business interests.