Nowadays, it seems like every company is outsourcing parts of their business. IT services, customer support, HR tasks – you name it, and someone’s paying an outside vendor to handle it for them. And it’s easy to see why! Outsourcing can save money, improve efficiency, and let companies focus on what they do best. But as helpful as outsourcing can be, it also comes with some serious risks, especially when it comes to keeping sensitive data secure.

See, when you hand off company data and systems to an outside provider, you’re also handing off control over that data. Suddenly there are all kinds of new opportunities for breaches, data misuse, and security lapses to happen outside of your watch. Just look at recent high-profile incidents like the Target and Equifax breaches. For any business dealing with confidential customer, employee or financial information, that’s scary! Data privacy and security have to be priorities, even (and especially) if critical processes are getting outsourced.

In this article, we’ll break down the data security risks that come with outsourcing, as well as the best practices companies should follow to mitigate those risks. That way, you can enjoy the benefits of outsourcing without compromising your most valuable asset – your data. Let’s get started!

Why Do Companies Outsource Processes Anyway?

Before we get into the risks, it helps to understand why companies find outsourcing so appealing in the first place. There are several key reasons:

– Cost savings – Outsourcing to specialized third-party providers can reduce labor, infrastructure, and operational costs for non-core business activities. Service providers achieve economies of scale across clients.

– Increased efficiency – Experienced vendors devote time, assets, and expertise to constantly improving their delivery of particular services, increasing quality, speed, and efficiency.

– Focus on core competencies – Outsourcing non-essential operations allows a company to focus its resources on core activities that drive competitive advantage and revenue growth.

– Access to expertise – Vendors maintain skilled teams and institutional knowledge for activities outside of a client’s primary business.

– Business agility and flexibility – Scaling outsourced processes up or down is easier than changing in-house staffing and systems.

– Innovation – Clients can take advantage of new technologies, tools, and best practices vendors constantly adopt to improve their services.

However, along with these potential benefits come a number of risks that must be addressed:

– Security risks – Outsourcing can increase vulnerabilities to data breaches, cyber attacks, and unauthorized data access unless adequate security controls are in place.

– Loss of control – Organizations cede some control over processes, tools, policies, and data management to the vendor. Closely monitoring vendor activities is necessary.

– Hidden costs – Transition and management costs related to outsourcing may offset some expected cost reductions.

– Loss of critical knowledge – Over time, specialized institutional knowledge transfers to the vendor rather than remaining internally. Knowledge transfer back to clients is limited.

– Vendor viability – Provider financial issues, an acquisition, or going out of business can disrupt service delivery. Multi-vendor strategies may be required.

– Compliance risks – Outsourcing may move data and processes outside of jurisdictions where regulations apply or introduce new compliance complexities.

It is critical that organizations carefully analyze these pros and cons, implement strong vendor management programs, and take steps to mitigate any risks before entering into outsourcing agreements. This is especially important when it comes to maintaining data privacy and security.

Data Privacy Concerns with Outsourcing 

Maintaining control over sensitive data is one of the top concerns and challenges with outsourcing business processes. Some specific data privacy risks that must be considered include:

Data exposure – Transferring data to external vendors inherently increases the number of points at which sensitive data could potentially be exposed or leaked through breaches, unauthorized access, or human error.

Loss of visibility – Once data is transmitted externally, ongoing visibility into how it is accessed, processed, and secured becomes limited. Remote data processing limits oversight.

Data location – Offshore outsourcing can relocate data outside jurisdictions with strong privacy laws, reducing compliance accountability and controls.

Subcontracting – Vendors may themselves outsource to fourth parties, propagating data even further from the client’s view and control. Unlimited subcontracting presents unknown risks.

Access abuse – Trusted vendor personnel could misuse access to data by viewing, modifying, destroying, or stealing data they interact with.

Unintended use – Data collected for one explicit purpose could be utilized for additional purposes without consent, such as big data analytics, profiling, or marketing.

Non-compliance – Vendors may not fully comply with contractual policies or all applicable regulations for data privacy either intentionally or through lack of adequate controls.

Return/destruction – At contract termination, vendors may retain data rather than fully returning or destroying it as obligated.

Ultimately these risks come down to a loss of control – organizations relinquish direct oversight of how their data is managed, secured, and used when handled by third parties. Without proper precautions, outsourcing can reduce an organization’s ability to govern its own data according to policy, regulatory requirements, and business needs.

While the risks are real, they can be effectively mitigated through careful vendor selection, contractual protections, security controls, auditing capabilities, and ongoing management. The next section highlights best practices in these areas that allow the benefits of outsourcing to be realized while still maintaining data privacy.

Strategies for Securing Data Privacy 

Organizations that rely on third-party vendors to handle critical data assets should adopt these best practices both when selecting vendors and managing ongoing engagements to limit data privacy risks:

Conduct Due Diligence on Vendors

A rigorous vendor due diligence process is required to assess risks up front and select reliable partners. Key due diligence steps include:

– Get extensive details on the provider’s data privacy and security programs, infrastructure, incident history, and certifications. Require supporting documentation.

– Review the provider’s responses to security assessment questionnaires, compliance attestations, and independent audit reports.

– Validate the provider has necessary data security controls and adequate disaster recovery protections.

– Assess the provider’s financial stability, leadership team, client references, staff backgrounds, and culture.

– Evaluate the provider’s data privacy commitments, policies, breach protocols, and insurance coverage.

– Confirm the provider complies with relevant regulatory requirements for the regions where data will be stored and processed. 

– Validate subcontracting practices – identify all downstream parties with data access.

Conducting in-depth due diligence disproportionate to the criticality of the data helps avoid high-risk vendors.

Use Encryption and Access Controls

Implement strong technical controls to secure data throughout its lifecycle when outside direct control:

– Encrypt data in transit and at rest – Prevent improper access to data as it transfers between networks and while stored on vendor systems. 

– Mask sensitive data elements – Remove or obscure personally identifiable information in data flows unless strictly required for the process.

– Enforce need-to-know access – Restrict data system access only to essential personnel, limit permissions, and implement strong identity and access management controls.

– Monitor user activity – Log, audit, and alert on all access to sensitive data to detect potential abuse and continually verify proper data handling by authorized users.

– Isolate data – Segregate client data in separate databases or storage instances not shared with other vendor clients when possible.

Limit Data Sharing 

Carefully determine what data is absolutely necessary for an outsourced process. Unneeded data should remain strictly internal. Options to limit sharing include:

– Anonymize/pseudonymize data to remove personally identifiable attributes when possible. 

– Only transfer discrete data elements required for a task, not entire datastores.

– Mask sensitive attributes like names, addresses, IDs, and account numbers in shared datasets.

– Use fake or de-identified test data for development/testing purposes instead of real customer data.

– If offshore providers are involved, keep sensitive data onshore if possible or implement secure regional data processing zones.

Maintain Oversight and Audit Rights

Contractual obligations are stronger when compliance can be continually verified through transparency and independent audits:  

– Maintain proprietary access to tools needed to monitor vendor security controls, access logs, data flows, and incident response. 

– Perform ongoing assessments of policies, performance, security posture, and reporting.

– Conduct on-site assessments of facilities, processes, technologies, and staff.

– Mandate unrestricted internal and third-party audit access to validate vendor compliance, security, and proper data handling.

Create Binding Contracts and SLAs

Contractual terms must provide recourse if vendors fail to meet data privacy commitments:

– Clearly define security, privacy, confidentiality, and data handling requirements with contractual liability for violations.

– Establish the right to audit and monitor for guaranteed transparency into data practices. 

– Set measurable security SLAs for encryption, access controls, data availability, incident notification, etc. 

– Require immediate breach notification and assistance with breach response obligations.

– Bind the vendor to all applicable regulations and certifications mandated within your industry.  

– Specify precisely how data can and cannot be used – contractually prohibit unauthorized use or retention.

– Establish data return/deletion at contract termination and financial penalties for non-compliance.

Know Your Data and Classify Accordingly

Not all data requires the same precautions – controls should align to sensitivity:

– Maintain an uptodate inventory of regulated, confidential, and mission-critical data.

– Map data flows between internal systems and external vendors.

– Classify data by sensitivity – higher risk data demands greater protections when sharing externally.

– Define allowable use cases, access restrictions, geographic limitations, and retention policies based on classification.

– Apply controls, contractual clauses, auditing focus, and management oversight proportional to data sensitivity and risk impact.

Anonymize or Pseudonymize Data

When possible, remove or obscure personally identifiable information before sharing external to the organization: 

– Anonymize data by permanently removing all unique identifiers and attributes that could trace back to an individual.

– Pseudonymize data by replacing identifiers with artificial substitutes which cannot be reversed by recipients. 

– Substitute fake placeholder values for sensitive attributes to prevent exposure of real customer data.

– Employ hashing, tokenization, or masking techniques to strip identifiable traits from externally exposed datasets when feasible.

Follow Data Protection Regulations

Adhere to all relevant data privacy regulations for jurisdictions impacted by the outsourcing arrangement:

– Classify data to identify which regulations apply based on attributes like personal data, origins, and processing locations.

– Map data flows to confirm transfers and all access adhere to applicable restrictions and conditions under regulations like GDPR, CCPA, HIPAA, and others.

– Confirm the provider will only process data according to authorized use cases in compliance with relevant regulations. 

– Contractually bind the provider to implement regulatory controls like breach notification and reporting. 

– Assess and document compliance for required privacy impact assessments and due diligence.

Documenting outsourcing impact on regulatory obligations preserves your compliance position.

Conclusion

Outsourcing business processes to external specialists enables impressive benefits like cost savings, flexibility, expertise access, and improved quality. However, the risks data privacy and security pose when entrusting third-parties with critical assets are profound. 

Robust due diligence, contractual controls, security technologies, auditing capabilities, regulatory compliance, and ongoing management are essential to allow outsourcing benefits to be realized while still controlling organizational data. Failing to protect data can lead to breaches, non-compliance, legal liability, loss of customer trust, financial penalties, and significant business disruption.

Ultimately, organizations must apply the same data protection rigor and compliance standards to outsourced environments as internally managed systems. By proactively addressing data privacy risks, companies can strategically outsource processes to enhance operations while keeping customer data, intellectual property, employee records, and other sensitive information secure.

With prudent precautions, outsourcing can strengthen business performance without compromising an organization’s most vital asset – its data. Maintaining data privacy builds customer and stakeholder trust that pays dividends far into the future.