IT Service Providers and Customers Battle Over Data Breaches | Features | ChannelWorld.in

PARTNER HOTLINES

IT Service Providers and Customers Battle Over Data Breaches

By Stephanie Overby, CIO.com on Mar 13, 2012

There is no shortage of contentious contractual issues when inking an IT outsourcing deal, but one in particular has both providers and customers taking a hard line today: liability for data breaches. At one time, data security liability was a relatively straightforward issue.

Generally speaking, an outsourcing customer always had the responsibility to secure its own data, but provisions were inserted into contracts allocating responsibility for the confidential information to which a service provider had access.At that time, outsourcers were willing to take on unlimited financial liability for a breach of confidential data.

"The service provider was on the hook," says Chris Ford, chair of the global sourcing group at the law firm Morrison & Foerster. For other data breaches, there may have been a limitation of liability, typically set at a year's worth of service provider revenue associated with the contract. There were few, if any, special terms or requirements around data security processes.

Then along came federal regulations like Gramm-Leach-Bliley and the Health Insurance Portability and Accountability Act (HIPAA) along with a swarm of state laws creating new requirements for companies suffering a data breach, including customer notification and damage mitigation provisions, such as mandatory credit monitoring and fraud protection for affected customers.
IT service providers saw the price tag on unlimited liability skyrocket. Potential damages from a data breach vary widely by industry and scope. Forrester estimated that the cost ranged from $90 to $305 per data record in 2007, while last year the Ponemon Institute tagged it at $214 per compromised record. "If you have a large customer base," Ford explained, "the price to comply could be very large."

IBM Reshapes the Liability Paradigm

And so the lawyers got to work. The big U.S. providers like IBM Global Services, HP and Accenture began reexamining their risk profiles and moving aggressively to limit liability. "Providers, led by IBM, pushed back hard," said Shawn Helms, partner in the outsourcing practice of law firm K&L Gates. They began creating secondary caps for certain breach of confidentiality or data protection measures. Those with clients with gigantic customer bases in sectors such as retail, energy or financial services were the most concerned.

"Companies like IBM took a very aggressive approach," said Ford. "The usual limitation on liability -- an amount equal to 12 months of revenue -- was a standard you never had to negotiate. They all became fairly aggressive about limited liability. It was a paradigm shift."

It became common to encounter outsourcing providers capping liability at two or three months of fees, said Robert Finkel, a partner in the corporate practice of the law firm Dewey & LeBoeuf. Meanwhile, most offshore vendors were willing to take on unlimited data security liability to get new business, and many still are, according to Finkel.

But among IBM and others that took a hard line on limited liability, negotiators would sometimes leave the table if the limits on data breach liability were financially unfeasible. "IBM took the corporate position that they were unwilling to assume that level of liability and even walked away from huge deals. Customers were frankly a little stunned," Ford said.

Outsourcing Customers Push Back on Liability

In recent years, however, outsourcing customers have begun to fight back. "Four or five years ago, they were okay with just getting some data breach liability," said Ford. "Now they're saying, 'We need a multiple of [the standard 12 months of fees] limitation.' I've seen a number of deals where it's three or four times that."

Outsourcing customers started demanding that new data security processes be written into their contracts, as well. "Customers understood the risks and started requiring more protection," said Helms. They began "demanding specific data security requirements, such as specific firewall policies, encryption or limited network access to [provider employees]," he said.

IT service buyers are also coming to the table with detailed risk profile assessments that put a real dollar figure on potential data breaches. "Customers are looking at this issue as hard as the service providers and saying, 'I'm handing my data over to you. You're in control of my data. If something goes wrong you need to take responsibility,'" Ford said.

In response, the outsourcing providers began adding very detailed exhibits to their agreements outlining their security obligations.

"In order for the customer to recover under one of these contracts, they have to prove a clear breach of these exhibits. If it's not listed, it's not [the provider's] obligation," Ford said. "It makes the likelihood of the customer recovering much lower."

It doesn't matter that no outsourcing providers or customers have encountered the kind of multi-million dollar data breach they most fear. "There hasn't been any big private case or the government leveraging any huge fines," said Finkel. "But it's inevitable. It will happen. And that's changed things on both sides."

Today, data breach liability "is the most contested provision in outsourcing contracts today," according to Ford. And it's only poised to become more contentious as customers consider cloud computing services.
"Today, this issue is a mess. Customers and providers are not getting closer on this issue, but further apart," Helms said. "As more data moves to the cloud, the allocation of risk is becoming more and more important."

Ford advises outsourcing buyers to push hard for data breach liability in contracts when it makes sense. If a service provider will not have access to confidential customer information, for example, it would be a waste of negotiating power to take a hard line on data security liability. But for those situations where a data breach is a bigger risk, it's important to understand where a provider's limits, and your own, might lie.

"You have to do due diligence and conduct a significant risk assessment as to the real potential liability," Ford said. "There will be a breaking point, but you have to figure that out through hard negotiation, and you have to figure out if that's something you can live with."


Latest Features

EDITOR'S PICK

Forecast 2015: IT Spending On An Upswing

As purse strings loosen up, CIOs blend innovation into 2015 IT budgets, but security and cost containment remain top priorities.

‘Security Compliance is Not a Proactive Phenomenon in India’

Pavan Duggal, Cyber Law Expert at the Supreme Court of India, explains why channel partners need to look beyond the IT Act 2000 as the security standards, given today’s fast-changing threat landscape, rapidly evolve.

IT is Indispensable for Business Optimization: David Aires, Intel

David L. Aires, VP, Information Technology Group, and GM, Information Technology Operations, believes security to be the biggest challenge in the current IT environment.

Is the CIO Role Nearing Extinction?

New technologies are shifting power to the hands of the user, endangering the CIO role. But do Indian CIOs consider that a threat or an opportunity? 

The Authentication Market is Big Play for Channels: Gaurav Chawla, Gemalto

We are building a partner network to address the increased demand for authentication solutions across India, says Gaurav Chawla, Director, IAM, Gemalto India.

Versatile Infosecurity: Riding the Security Wave

It takes vision and persistence to stay on top of the security curve. Versatile Infosecurity has mastered that art.

How Futurenet Technologies Helped Sterlite Copper Adopt Next-gen Client Computing

Sterlite Copper was able to successfully adopt next-gen client computing facilities with hand-in-hand assistance from Chennai-based Futurenet Technologies.

DigitalTrack Solutions: Right on the Security Track

DigitalTrack is keeping pace with the changes in the IT security space through DDoS and WAF solutions and is pushing security audits as part of its next move.

SLIDESHOWS

6 Leaders Who Headed for an Abrupt Exit

The abrupt exit of top leaders of Indian and global tech companies this year, with many of them citing ambiguous reasons, surprised the technology world.

Gartner Executive Summary Survey 2014

Gartner's Annual CIO Survey highlights the trends that will drive organizational IT spend in 2014.

10 Overhyped Tech Products That Crashed and Burned

The demos blew everyone away. Then reality hit.

Gartner Executive Summary Survey 2014

Gartner's Annual CIO Survey highlights the trends that will drive organizational IT spend in 2014.

ChannelWorld Survey: State of the Market 2014

Partners poll their sentiments, expectations, pain points, and challenges for the coming year.

FAST TRACK

Mudra Electronics

A vendor-agnostic strategy helped us sustain business, says Bharat Shetty, CMD, Mudra Electronics.

Systematix Technologies

Our USP is a customer-friendly approach backed by services, says Akhilesh Khandelwal, Director, Systematix Technologies.

CorporateServe Solutions

Our ability to turnaround complex ERP projects in record time is what gets us customer referral, says Vinay Vohra, Founder & CEO, CorporateServe Solutions.

KernelSphere Technologies

We are emerging as an end-to-end systems integrator, says Vinod Kumar, MD, KernelSphere Technologies.

Uniware Systems

We constantly validate emerging technologies for first-mover advantage, says Vergis K.R., CEO, Uniware Systems.

Astek Networking & Solutions

An innovative approach helps us stay successful, says Ashish Agarwal, CEO, Astek Networking & Solutions.

CSM Technologies

Our approach is backed by innovation and simplicity, says Priyadarshi Nanu Pany, CEO, CSM Technologies.

ETSC Computers

We want to be recognized as a complete solution provider, says Kailash Gupta, Director, ETSC Computers.

VIDEOS

Arun Parameswaran on VMware’s Cloud, Mobile, SDx Strategy

Arun Parameswaran, MD, VMware India, talks about transformation, strategy, roadmap, and VMware’s role in driving the shift to cloud, mobile, and SDx.

Parag Arora, Citrix: Our Portfolio Will Augment Our Strategy

Parag Arora, Area Vice President, Citrix India, elaborates on his action plan for the company after taking over operations in India.

Shibu Paul, Array Networks: ADN is a Great Business Opportunity for Channels

Shibu Paul elaborates on how Array Networks is empowering its partner ecosystem to address the modern datacenter challenges in India.

Scott Robertson, WatchGuard: We are an End-to-End Security Solutions Company

Scott Robertson of WatchGuard elaborates on the company’s partner roadmap in India and its subsequent shift in the security space.

Gaurav Ahluwalia, R&M: Channels Will Accelerate Our Datacenter Business

Gaurav Ahluwalia of R&M speaks on the company’s renewed focus to build its channel ecosystem and address the datacenter demands of India Inc.

Venkat Murthy, 22by7 Solutions: Real Value is in Solutions

Venkat Murthy, Prime Mover, 22by7 Solutions, elaborates on the need to look at a solutions approach rather than a mere hardware approach.

What Channel Partners Can Learn from a Sahara Adventurer

Steve Donahue, a desert adventurer and a best-selling author, takes experiences from this travels in the Sahara and turns them into lessons for channel partners, as they navigate the shifting sands of today's business and IT environment.

Rahul Agarwal, Lenovo: Profitability and Value Proposition are Vital

Rahul Agarwal, executive director, Commercial Business Segment, Lenovo India, talks about Lenovo’s renewed channel strategy and why the company is now an attractive proposition for its partners.

EMC PARTNER SHOWCASE

Partnering for Profitability

Atul H. Gosar, Director, Network Techlab, shares how the company’s association with EMC has provided it with a competitive edge and a wide customer base, leading to increased profitability.

Sponsored Content

Promising Pipeline

Venkat Murthy, Prime Mover, 22by7 Solutions, shares how EMC brings in competitive edge by enabling technology, GTM and lead generation, helping 22by7 acquire new customers and retain old ones.

Sponsored Content

Powerful Performance

Deepak Jadhav, Director, VDA Infosolutions, says initiatives by EMC around training and certification have helped the company’s staff improve its performance and enhance customer experience.

Sponsored Content

Performance Booster

Rajiv Kumar, CEO, Proactive Data Systems, says that the solution provider’s association with EMC has helped expand its customer base and added value to existing offerings.

Sponsored Content

Pursuit of Profitability

Santosh Agrawal, CEO, Esconet Technologies, shares insights on how the systems integrator’s association with EMC has spelled sustained success over the years.

Sponsored Content

Non-Performance is Not an Option

Nitin Aggarwal, Director, Trifin Technologies, shares insights on how the association with EMC has helped the system integrator stand out and empowered its personnel to deliver consistent performance.

Sponsored Content

STRATEGIC DIRECTIONS 2014

Driving IT to Make an Impact: IDC

IT is being increasingly viewed as something which would help drive revenue rather than just another cost line-item.

Software-Defined Infrastructure: Forrester

Firms must invest in transforming infrastructure to eradicate complex infrastructure to keep pace with business needs.

Better Safe Than Sorry: PwC

Organizations should create a culture of security that starts with commitment of top executives and cascades to all employees and third parties.

New Skills for a New Era: Gartner

A new talent strategy is required—one that is a key part of the evolving IT strategy and one that focuses on a blend of business and modern IT skills.

The Rise and Growth of Big Data: Ernst & Young

Leading organizations are reaping rich rewards on their investment in big data even as competition struggles to keep pace.

SOCIAL MEDIA @ CW India
SIGNUP FOR OUR NEWSLETTER

Signup for our newsletter and get regular updates.