Which weighs more: A pound of feathers or a pound of gold?
This trick question, much beloved by grade school children, is straightforward. A pound of feathers weighs more. This is because feathers are measured in avoirdupois ounces and gold is measured in troy ounces. A pound of feathers is sixteen avoirdupois ounces, and weighs 453.592 grams. A pound of gold is fourteen troy ounces, and weighs 373.24 grams. And yet, even though lighter, a pound of gold is worth more than a pound of feathers. A more interesting question relates to dollars saved. Imagine that you wanted to save your company $100 million. One way to do it is to move all your data processing abroad and fire the 1000 people in your current IT staff. Another way would be to implement an OPSEC program, and cut $100 million in losses.
Now, which hundred million is more valuable? Which is the pound of gold and which is the pound of feathers? One perspective is that the closing down of the data center is the pound of gold. For a start, it is visible: A thousand people get canned, and a lot of technology gets transferred. It also has the theoretical benefit of knowing that in a finite period of time the info centers will be repatriated, based on a combination of increasing costs abroad and decreasing costs here. This too will be visible, therefore good. This is quite different from loss of intellectual property, which is not directly visible.
The other view – our view, as it happens – is that protection of intellectual property, which makes up 70 percent of the value of most organizations, is the pound of gold. According to Aberdeen Group’s Protecting Product Intellectual Property Benchmark Report, 48% of manufacturers report lost market share, 44% experienced lost sales, and 27% disclosed lower margins. All of these go into the $300 billion lost by American companies each year to competitive intelligence, economic espionage, and theft.
Now, we have a fair idea of the impact of theft of “stuff” at the retail level. This is broken down well by Liz Martinez in The Retail Manager’s Guide to Crime & Loss Prevention (see the March 2005 issue of ÆGIS). She says: Another way to look at the loss/profit equation is the Rule of 33. The Rule of 33 deals with a hypothetical item of merchandise that sells for $100. The wholesale cost of this item is approximately $45, which leaves us $55 as the amount of gross profit. Subtract another $28 for uncontrollable expenses, plus $15 for controllable expenses. The net profit at this point is about $12. Now, deduct another $9 for taxes, and the grand total of the net profit on this $100 item is $3 (after taxes).
To put this equation into perspective, when you sell one of these $100 items, you have generated a bottom-line profit of $3. If someone steals one of these $100 items, its theft represents a bottom-line loss of $97 because the stolen item costs the same as the item you sold. So in order to make up the money you lost when the $100 item was shoplifted, you have to sell another 33 of this same item before you will realize your first penny of bottom-line net profit.
Now $100 million may not seem like a lot. As one senior manager put it to us, “So I lose $50 million or $100 million, and I have to close down a division. So what? I am a 35 billion dollar company: It is simply not material.” Putting aside the SEC’s disagreement with this, and the likely disagreement on the part of shareholders and those needlessly laid off, loss of profits is not the same as cost savings. It is even worse than the replacement cost of loss of merchandise stolen, because you will likely have to re-create a new R&D cycle. Which will in turn be stolen. While we do not yet have the figures available for IPCI loss that we have for retail item loss, we can certainly assume the same kind of multiplier effect.
Unfortunately, while the $100 million loss of IPCI may be the pound of gold, the visibility of the cuts will probably be more attractive to most, as the cost of loss of IPCI will be bourn by those who follow in the future, while the credit for the visible measures will accrue to those who lead in the present. They will choose the pound of feathers.