Cost-Benefit Analysis of an American GDPR for the Information Technology Industry

Cost-Benefit Analysis of an American GDPR for the Information Technology Industry

Author: Brendan Quinn

Abstract 

This paper analyzes the General Data Protection Regulation (GDPR) and the immediate economic burden it places on the information technology industry in the European Union: compliance costs and a decrease in technology venture investment. In addition, this paper will identify long-term compliance benefits that companies have already begun to experience due to their compliance with the GDPR: with sales delays and data breaches. The purpose of this paper is to answer the question, “for the American information technology industry, what is the cost-benefit analysis of a comprehensive national data regulation similar to the European Union’s General Data Protection Regulation?”

1 Introduction

The introduction of big data analytics into the global economy has created new ways in which companies interact with their customers. Increasingly, companies have collected personal data from individual customers and potential customers. Personal data serves as a valuable intangible asset for companies in three main industries: information technology, healthcare, and finance. Companies will collect information on an individual’s character traits, internet activity, work, and hobbies to target sales to individuals. Many companies in these industries also participate in data sharing, employing data brokers, in which they will buy and sell an individuals’ data without the consent of that individual. While companies utilize big data as an opportunity to optimize business practices and increase profits, consumers are skeptical of the process. According to The Cognizant Center for the Future of Work, 65% of people do not know what data is being collected, where it is stored, or how companies use their data largely due to a lack of transparency. Not only is the public largely uninformed, but also 91% of Americans believe they have lost control of their personal data, according to the Pew Research Center. The same study from the Pew Research Center concluded that 61% of Americans wish more could be done to protect their personal information and two-thirds said the current laws do not provide adequate protection. The current structure of data privacy laws in the United States is largely disorganized with protection varying from state to state and lacking a comprehensive national data regulation. In total, according to my research through my internship at Cisco Systems, there are 253 separate state data privacy-related statutes in the United States as of September 2019. This internship opportunity provided me with a personal insight into the demands companies face when attempting to comply with the various state data privacy regulations in the United States. The overarching issue that many businesses struggle to overcome when it comes to keeping up with the current data privacy regulations in the United States is that there is no central organizational document of any type that contains all the different requirements for each states’ data privacy laws. In addition to this logistical issue, these data privacy statutes are constantly changing making it extremely time-consuming and costly for companies to keep up to date on the current data privacy laws in the United States. Just to clarify, some national privacy regulations that include data privacy protections such as The Health Insurance and Portability Act (HIPAA) do exist in the United States; however; these regulations are industry-specific and are simply a baseline for states to follow when creating their privacy regulations. In contrast with the United States, the European Union, on April 14, 2016, adopted the General Data Protection Regulation (GDPR), which became enforceable on May 25, 2018. The GDPR aims primarily to strengthen individual rights over the ownership of personal data and to simplify the compliance process to a single set of requirements. The GDPR is a ground-breaking piece of legislation that is the first of its kind in strictness and comprehensibility. A few notable policies of the GDPR are its new rules governing consent, the right to be forgotten, the right to be informed, the right to data access, the right to breach notifications, and strict fines. To explain each of these more in-depth, the GDPR’s rules regarding consent are that it must be clear, concise, and use colloquial language to prevent companies from abusing the data collection process through unclear terms of use agreements. Next, the right to be forgotten is a GDPR requirement that instructs all data collectors to respect any individual's request to forget their information. The right to be informed requires that businesses be transparent in the data collection process in what data is being collected and how it will be used through a privacy notice. Another policy implemented by the GDPR is the right to data access which requires businesses to provide a copy of all data stored free of charge upon an individual's request. Lastly, the right to breach notifications refers to the GDPR policy that requires businesses to notify individuals of a data breach within 72-hours of its discovery. To enforce all these policies, the GDPR has implemented strict fines of up to 20 million euro (22.4 million USD) or a 4% annual global turnover, whichever is higher, if a business is found in non-compliance (Cusick, 2018). This paper will use the structure and regulatory strictness of the GDPR as a model for a potential national data privacy law in the United States. It is important to note that the GDPR also applies to companies headquartered outside the European Union if they deal with European Union citizens as customers. This overlap of regulation is imperative to my research as many international companies with business dealings in the European Union will have already met the compliance requirements of similar regulations in the United States. 

2 Methodology

By analyzing technology venture investments and compliance costs this paper examines the short-term costs of the GDPR for the information technology industry. The paper also takes into account long-term compliance benefits. Since the GDPR was only recently implemented and there is no precedent to set standards of economic effect from regulation as such, this paper only considers compliance benefits in the long term. Analyzing the short-term cost of the GDPR for the European Union’s information technology industry will allow for an accurate prediction of how the United States' information technology industry will be affected by a similar national regulation. I will take into consideration recently published work, economic data, and informational reports when presenting findings on a theoretical net cost of a GDPR similar law in the United States. Despite Brexit, this study includes economic data for Great Britain due to a GDPR similar law being adopted by Great Britain around the same time as the European Union adopted the GDPR. Any data about an industry other than the information technology listed are excluded from this study. The reasons for focusing on the information technology industry in my research are: the information technology industry has the highest concentration of personal data collection and the information technology industry relies heavily on investment funding for small or medium-sized firms that would be most affected by a GDPR-like law in the United States. Additionally, there is little availability of economic data analysis on the effect of the GDPR since the regulation was recently implemented and has been enforced for only about a year. Furthermore, isolating the economic effect of a series of regulations of many different industries is difficult to isolate and quantify. This study relies heavily on other independent studies for quantitative research, and for that reason, I decided to analyze, in-depth, the methodology of each of these studies to grasp the true meanings of their findings.

3 Technology Venture Investment

As part of my short-term analysis, I looked at both investor confidence (through investment trends in the industry) and consumer confidence in the European Union’s information technology industry. A recent joint study from the University of Maryland and Illinois Institute of Technology analyzed a data set of 140,005 technology venture investment deals from GDPR compliant European countries (24 in total) from January 2014 to April 2019. Of those deals, 61.92% of them were from the information technology industry. The study tallied each deal per month per crude industry in each European Union member state that has implemented the GDPR. Regulatory strictness was also accounted for between countries. The sample data is also stratified into four different company age groups: new (0-3 years old), young (3-6 years old), established (6-9 years old), and mature (9+ years old). The study used a difference in difference methodology while using European Union ventures as their treatment group and United States ventures as their control. The empirical analysis was carried out at two levels: aggregate level, which shows the average number of deals per month, and deal level, which shows the average dollar value of the deals per month. For the aggregate level analysis the formula, ysct = αs +αc +αt +δXst +β1EUs×GDPR Enactt +β2EUs×GDPR Rolloutt +εsct, was used. While for the deal level analysis the formula, ln(yjsct) = αs+αc+αt+δXjsct+β1EUs×GDPR Enactt+β2EUs×GDPR Rolloutt+εsct, was used. The study concluded that there was an overall negative effect on technology venture investment after the rollout of the GDPR (there was little to no immediate effect after the law was adopted) on the number of venture deals, the size of those deals, and the overall dollar amount invested. The study also pointed out the companies most affected were young businesses ranging from 0 to 6 years old who made up 70% of the companies in the sample. Technology venture investment is a useful statistic to analyze as it is necessary for startup companies and highlights investors’ confidence in the market. The study was thereby able to confirm a decrease in investor confidence in new companies’ ability to comply with a strict comprehensive data regulation (Jia et al., 2019). Consumer confidence on the other hand sees no identifiable change related to the GDPR from the period before to after the rollout of the GDPR in the European Union. While consumer confidence in the European Union did drop steadily after the rollout of the GDPR, a similar drop in United States consumer confidence also dropped in the same time frame (Trading Economics, 2019). Furthermore, I determined that consumer confidence would be an inaccurate statistic to determine the effect of the GDPR as about 33% of Europeans have not even heard of the GDPR and 80% of Europeans cannot name the authority that is responsible for protecting their privacy rights (European Commission, 2019). 

4 Cost of Compliance

The second phase of my short-term analysis analyzes the cost of compliance for the GDPR, which it can be assumed would be similar to a United States version of a similar law. What I discovered was that the cost of compliance with the GDPR varies based on industry, company size, and information technology systems. A study was conducted of FTSE100 companies (a share index of the 100 companies listed on the London Stock Exchange). Sia Partners, a management consulting firm, provides a deeper analysis of this study. In this analysis, factors such as industry and company size are taken into account for the compliance costs. The study reveals the average cost of compliance is about USD 16.8 million with the cost per employee averaging between $335.02 to $502.54. Concerning the information technology industry, there was an average compliance cost of $22.3 million per company. Only the banking industry had a higher average compliance cost per company than the information technology industry. Average cost per company was also calculated within five employee population stratifications: 1,000 to 5,000 employees ($1.1 million), 5,000 to 10,000 employees ($3.4 million), 10,000 to 50,000 ($8.9 million), 50,000 to 100,000 ($31.3 million), and more than 100,000 employees ($43.6 million) (Sia Partners, 2018). A separate study of GDPR compliance costs analyzes data collected from 300 c-level security executives. This study looked at factors including how many employees were recruited to help with compliance if a third party was hired to assist compliance and the overall cost of compliance. According to this study, 36.8% of companies had to hire 6 to 10 new employees to assist with compliance and 31% had to hire 2 to 5 new employees. Only 4.3% of companies did not need to hire any new employees and 18.5% had to hire more than 10. The study also revealed the cost of compliance in 5 stratifications: 9.9% (less than $10,000), 20.2% ($10,000-$50,000), 35.8% ($50,000-$100,000), 23.8% ($100,000-$1,000,000), 10.3% (more than $1,000,000) (Zorz, 2018). Both studies conclude that there are unavoidable costs of compliance with the GDPR, which must be expected for a GDPR similar law in the United States.

5 Long-term Benefits

Lastly, for my analysis of long-term benefits, I examined a data privacy benchmark study conducted by Cisco Systems’ Cybersecurity series in January of 2019 that analyzed long-term benefits for GDPR compliance with sales delays and data breaches. The study used GDPR compliant companies as a treatment group and non-compliant companies as a control group, while blocking three groups based on GDPR compliance readiness: GDPR ready, less than a year before ready to comply, and more than a year before ready to comply. The data compiled in this study is not exclusive to the European Union (companies around the world must comply with the GDPR) or to the information technology industry, yet similar findings could be assumed for the information technology industry. The findings of this study reveal that sales delays due to privacy issues were significantly lower for GDPR compliant companies than non-compliant companies. There was even a reduction in sales delays between less than a year before ready to comply and more than a year before ready to comply companies. To be exact, the average sales delay for GDPR ready companies was 3.4 weeks, while the average for non-compliant companies was 4.5 for less than a year before ready to comply and 5.4 weeks more than a year before ready to comply. As for data breaches, GDPR compliant companies are less likely to experience a breach, fewer records are affected, and there is less downtime due to breach. GDPR compliant companies are 74% likely to experience a breach compared to 80% and 89% for less than a year before being ready to comply and more than a year before being ready to comply respectively. On average 79,000 records are affected in a GDPR compliant company data breach, while non-compliant companies on average have 100,000 records affected for less than a year before ready to comply companies and 212,000 records for more than a year before ready to comply. For cooldown times due to breaches, GDPR compliant companies experience on average 6.4 weeks of cooldown time compared to 8.1 weeks for less than a year before being ready to comply and 9.4 weeks for more than a year before being ready to comply. With fewer records impacted and reduced cooldown times along with a lesser chance of a data breach, GDPR compliant companies can expect lower overall costs associated with data breaches. Furthermore, the study revealed the probability of losing more than $500,000 due to a data breach was 37% for GDPR compliant companies compared to 46% for less than a year before ready to comply and 64% for more than a year before ready to comply (Cisco, 2019).

6 Implications

The pertinent issue in the United States in regard to data privacy is the disorganized setup of State mandated laws that each differ in regulatory strictness, definitions of personal data, and penalties. The purpose of this research is not to promote a nationalized data privacy regulation in the United States, but rather to determine a cost-benefit analysis for one in the industry that would be most affected by it. A comprehensive national data privacy regulation is only one possible solution to the data privacy issue the United States faces and could very well not be the best or most cost-effective solution. Without further research on how a GDPR-similar law would fare compared to several other possible solutions, I cannot conclude the effectiveness of this solution. However, there has been a recent push, started by the Business Roundtable, in Congress for the passage of a comprehensive national data privacy regulation in the United States structured similarly to the GDPR. In addition, California passed its own comprehensive data privacy regulation in June of 2018 called the California Consumer Privacy Act also structured after the GDPR. With this new policy push, there will undoubtedly be extensive studies conducted soon to expose what I have discussed in this research report on the costs and benefits of a GDPR-like law in the United States.

7 Conclusions

As stated before, the current research surrounding a cost-benefit analysis of the GDPR is limited to about a year’s worth of economic data so long-term predictions are difficult to accurately display. My immediate thought upon pursuing my topic was to analyze industry data on consumer confidence in the European Union’s information technology industry because the GDPR is a consumer protection orientated regulation. The idea was that with these new privacy protections many people have grown concerned about in the past few years consumers would be more likely to do business with companies that deal heavily with consumer personal information such as information technology firms. The issue with my assumption was that few Europeans are informed on what the GDPR is and how it secures their data. The only way to identify the impact of the GDPR on consumer confidence in the European Union’s information technology industry would be to wait a few years until consumers are more informed of the new protections they have acquired. So instead of consumer confidence, I decided to look at investor confidence as a predictor of future economic success due to the rollout of the GDPR. Since investors are financially inclined to be well-informed on impactful legislation on their chosen investment, a sudden shift in investor confidence could indicate an economic impact of the GDPR. Under this theory, if there was an immediate decrease of technology venture investment in the European Union’s information technology industry after the rollout of the GDPR then there would be short-term economic losses for the industry’s firms. The reason for investors to decrease the true mean average of investments shortly after a large regulation enactment can be attributed to fear of companies not being able to meet the legal requirements of such regulation or be able to afford the resource requirements necessary to meet such legal requirements. This decrease in technology venture investment and subsequently investor confidence is exactly what I was able to analyze in the data recorded by the joint study from the University of Maryland and Illinois Institute of Technology. A GDPR-like law in the United States would be expected to have a similar immediate negative impact, but to a lesser extent since many information technology firms in the United States are already in compliance with the GDPR and investors have precedent to combat their fears. Of course, the loss of investment is also supplemented by a cost of compliance for firms dependent on several variables. I can safely conclude there would be definite immediate negative economic effects of a GDPR-like law for a startup (0-3) and young (3-6 years old) companies in the United States information technology industry. As for the long term, this paper previously stated there is no accurate method to predict how investor confidence will change. However, once investors have set the precedent of investing in information technology companies affected by the GDPR immediate negative effects will be diminished for future similar regulations in other parts of the world, which would benefit the American information technology industry if a similar law were to be introduced in the United States. What can be determined as definite long-term benefits of the GDPR for the information technology industry are those associated with its compliance? As identified by the Cisco Systems’ Cybersecurity Series in January of 2019, which conducted a global data privacy benchmark study based on GDPR compliance, long-term compliance benefits of the GDPR include those associated with data breaches, sales delays, and cooldown times. The Cisco Systems’ study showed how companies, including those based outside the European Union, who complied and even those who were less than a year before being compliance-ready saw decreases in the overall costs of data breaches, a decrease in the number of files exposed by a breach, were less likely to have a data breach, experienced shortened sales delays, and experienced shortened cooldown times due to a breach. These benefits identified by the Cisco Systems study were largely qualitative in contrast to the results of my research on the short-term of the GDPR for the information technology industry. The combination of qualitative and quantitative results is what allows me to compile the most comprehensive cost-benefit analysis for a GDPR similar law for the United States information technology industry with the limited research revolving around the complicated and new issue of data privacy.

8 Further Research

While I believe my research was the most conclusive possible regarding the resources available to me as well as the general lack of substantial research surrounding my chosen topic, I recognize that there are gaps as well as available improvements for my research. Proper research of this topic would require advanced resources to conduct individual samples of companies to collect data on the financial effect the GDPR has on European Union information technology firms. In addition, more time is necessary for the true effect of the GDPR on the European Union’s information technology industry to be identified. This research could be, if properly funded and conducted, essential to the possible adoption of a similar law in the United States by the United States Congress. Currently, there is a substantial push in Congress led by many well-known American companies and the Business Roundtable. However, this push has been impaired by the lack of current research on the true economic and financial effects of such a regulation. With possible future research on the qualitative benefits laid out in my research and future data on investor confidence as well as consumer confidence data from an informed European Union citizenry, a substantial policy change resulting in more consumer privacy protections may be plausible. For such legislation to be considered, I would suggest that a few ideas from my research be further investigated. Namely, a distinct cost-benefit analysis would have to be conducted in many different American industries since the level of interaction with personal consumer data will greatly affect how each industry will be affected by a GDPR similar law. On top of these distinctions, the industry-specific cost-benefit analysis would have to identify the differences in benefits and costs for different-sized companies. The reason the company size distinction matters is because large corporations have the most to gain from an American GDPR because they would already meet the compliance requirements without having to pay immediate compliance costs as smaller businesses would have to. This is not to say that a GDPR similar law would have an overall negative effect on small American businesses, just that compliance costs are a one-time cost and only international companies would benefit from not paying the immediate compliance costs on the American GDPR. Particularly, startup (0-3 years old) businesses will suffer because any type of business regulation will raise the costs of creating new businesses, which subsequently leads to less competition in the marketplace. Another area of my research I would suggest future research is on the unknown gap in how the research surrounding the effect of the GDPR has on the European information technology industry is different from how a GDPR similar law would affect the American information technology industry. This research would be necessary to integrate into the current research surrounding the GDPR in proposing a similar law in the United States to create the most accurate cost-benefit analysis of an American GDPR’s effect on the information technology industry. I hope that this research will inspire further research into the question, “for the American information technology industry, what is the cost-benefit analysis of a comprehensive national data regulation similar to the European Union’s General Data Protection Regulation?”, and provide a more accurate cost-benefit analysis than the one provided in this paper.

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