Service Provider Risk and Compliance

Service Provider Risk and Compliance

In our continuing effort to educate on the importance of risk assessment and compliance, this week we wanted to touch base on service provider risk and what you can do to help reduce it. We’ve had many customers unclear on the terminology of a service provider and wonder how they, as an organization, can be affected by their risk or lack of compliance, so we’ll break it down step-by-step.

What is a Service Provider?

A service provider is an organization that supplies you with- you guessed it- a service. These services can range from legal, consulting, communications, data storage, financial, or risk assessment, to name a few. The company that brings water to your office every week and the business that stores your highly confidential customer information are both service providers.

While these relationships help the company to grow and continue to function, they also bring a collection of new risks to the table that need to be addressed.

Why Service Provider Risk is Important

It’s possible for service providers to be a subset of your organization, but in most cases, you’re dealing with third parties or an outsourced supplier. This can result in increased organizational risk since the company’s operations are out of your direct supervision. If the organization is not assessing their own risks or compliance, fees and setbacks in your service can come soon after. Service provider risk and compliance often shifts into focus when you realize their potential for impact on your own company.

Challenges with Service Providers


The challenges that typically come with service providers include situations such as limited transparency, unclear or unmet expectations, or uncompromising contract terms. Let’s say your electric provider has a facility surrounded by dead trees. Is there protocol established for one of those trees falling onto a transformer, or if the forest catches fire? You need to make sure your service providers are taking steps to proactively prevent disruption to your service or standards.

In another example, let’s say you utilize a service provider to store and keep safe your sensitive data. Perhaps in your contract, you didn’t clearly specify that the service provider needs to address risk and meet certain levels of safety, so your data isn’t as secure as you thought it was. In the instance of a data breach where your data becomes exposed, you may be liable. In a recent incident, one of Delta’s service providers suffered a breach. If you’re not concerned with the financial fees, the resulting media backlash alone can have lasting consequences. Even when using a third party, you are ultimately the one responsible for keeping your data safe. Failing to choose a suitable service provider proves negligence on your part.

The primary challenge is that both parties need to clearly understand what is being expected and at what quality. Risk is never going to be zeroed out, so it’s wise to establish “what-if” scenarios to determine acceptable countermeasures. Often, companies will complete their due diligence in selecting a service provider to do business with, but what if their contract doesn’t stipulate compliance regulations or quality level? Companies can select a low-risk third party only to discover a few years later that their performance has slipped, or they are no longer compliant with government mandates. Without specifying these requirements in contracts, your business may be stuck in a tough spot of gambling on risk or taking a loss and breaking contract.

Solutions to Service Provider Risk and Compliance

While this all sounds like a nightmare, don’t swear off your service providers just yet. The first step is to make sure your contract clearly states what is expected – security, quality, compliance, etc. Mitigating third-party risks and monitoring compliance is vital to ensure everything runs smoothly, but first you need to make sure your service provider is aware of your expectations and you set the precedent that these expectations will be upheld.

Second, establish a comprehensive program for ensuring risk assessments, audits, and timely remediations. Creating an environment that is proactive and not reactive will save you time, money, and energy down the line. It’s time to stop viewing service providers as a separate entity and more as an extension of your company.

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