Return On Information Security Investments: Myths Vs. Realities
Information security (IS) breaches are a growing concern. In fact, 90% of the respondents in a recent study of private and public organizations conducted by the Computer Security Institute and the FBI experienced recognized security breaches in the previous year. To protect the confidentiality, integrity, and option of information, while guaranteeing authenticity and nonrepudiation, organizations are trading large sums of profit IS activities. Since security investments are contending for funds that might be used elsewhere, it’s not surprising that CFOs are demanding a rational, financial approach to such expenses.
One ever more popular metric for recording the cost-benefit aspect of information security is the return on information security investments, also called return on security investments, or ROSI. Chief information officers (CIOs) as well as CFOs are embracing it, but its strengths and weaknesses aren’t well realized, which includes led to misunderstandings and misuse.
To clarify, let’s examine some myths and realities. Myth 1: The accounting idea of “return on investment” can be an appropriate idea for evaluating information security investments. A cursory reading of articles and books could cause you to believe that the idea of accounting return on investment, or ROI (accounting income divided by accounting asset value), is valid for analyzing investment decisions. That isn’t the situation.
Reality: The accounting ROI concept is not add up to a true economic rate of come back, so it must not be used to judge investments. The economic rate of return, usually called the internal rate of return (IRR), is the appropriate metric for analyzing investments, including information security investments. As most financial experts know, there’s no simple procedure for converting ROI to IRR.
The irreconcilable variations between ROI and IRR stem from the actual fact that accounting notions of income and asset ideals derive from historical (former mate post) accrual and nondiscounted principles. In contrast, financial notions of income and asset values are based on future (ex-ante) risk-adjusted reduced cash moves. Advocates of the ROSI idea should be using the economic notion of IRR, then the accounting idea of ROI rather, for analyzing information security investments. Myth 2: Maximizing the IRR on information security investments can be an appropriate objective.
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On the top, it seems logical to presume that a firm with an increased inner rate of come back is doing much better than a company with a lower inner rate of come back. Indeed, inferences suggesting that a company should try to increase its overall come back on investments (including information security-related investments) are normal.
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