Category: News

Outsourcing trends

Organizations are continually in pursuit of opportunities to leverage their competitive advantages, expand into new markets, and bolster their profits. An emerging trend in the corporate landscape involves the outsourcing of non-core business functions. However, even with this outsourcing, it remains the responsibility of management to oversee risk management and the effective implementation of a robust control framework. Consequently, there has been a rising demand for control assurance, often evaluated through standards such as ISAE 3402 or ISAE 3000, especially for activities carried out by third parties.

Historical Background For most of the 20th century, the dominant business model revolved around large integrated companies that had complete ownership, management, and control over their assets. These corporations emphasized diversification to broaden their corporate foundations and capitalize on economies of scale. As the century unfolded, a shift occurred, compelling many large enterprises to adopt a strategy that focused on their core business areas. This approach aimed to enhance flexibility and creativity by identifying critical processes and determining which could be entrusted to external service providers.

The World of Outsourcing Globalization, heightened competition, and cost pressures have driven organizations to outsource a broader range of vital business functions to external service providers. This extends beyond traditional back-office tasks, impacting an organization’s financial statements and essential business processes. As a result, there is a growing need to instill confidence in outsourced business processes. How can an organization regain control and assurance over processes that are no longer directly managed?

Expanding outsourcing practices and entrusting critical business data to external entities inevitably heightens security concerns and risks. Potential consequences include operational disruptions, financial setbacks, or damage to an organization’s reputation, all due to security deficiencies within the realm of outsourced services. To mitigate these risks and regain assurance over outsourced operations, organizations are increasingly turning to independent assessments of the critical processes that have been delegated to external service providers, particularly concerning IT systems.

Common Motivations for Outsourcing Include:

  1. Control and cost reduction
  2. Enhanced focus on core business processes
  3. Access to world-class capabilities
  4. Optimizing internal resources for alternative uses
  5. Increased efficiency in specific functions
  6. Insufficient internal resources
  7. Risk-sharing with other organizations

The Current Landscape: Strategic Partnerships In the ongoing evolution of outsourcing, a significant shift has occurred, challenging the earlier notion that organizations could not outsource their core competencies. This paradigm shift has made standards such as ISAE 3402 | SOC1 and ISAE 3000 | SOC2 common practice, facilitating organizations’ engagement in strategic partnerships.

ISO 27001 certification benefits

Obtaining an ISO 27001 certification offers a multitude of advantages, not only for your internal operations but also for your relationships with customers and partners. This certification leads to heightened information security within your premises and among your employees while continuously enhancing your business processes. These benefits extend to your stakeholders as you effectively mitigate information security risks, establishing yourself as a trustworthy collaborative partner.

Minimized Information Security Risks and Ensured Continuity: The ISO 27001 certification process doesn’t solely uncover internal information security risks; it also sheds light on external threats. As a response, the necessary security measures are implemented. This proactive approach serves as a safeguard against security incidents that could potentially lead to data breaches, negative public exposure, or even claims for damages. Prioritizing information and data protection is vital, both for the individuals involved and for preserving your organization’s image and reputation. With ISO measures in place, the likelihood of sensitive information being compromised is significantly reduced.

Demonstrated Adherence to Privacy Laws and Regulations: ISO 27001 certification demonstrates your organization’s compliance with the privacy requirements outlined in GDPR and other relevant laws. While this compliance might be inherent in your operations, it serves as a valuable reassurance for your customers.

Enhanced Reliability for Customers: One of the primary merits of an ISO 27001 certificate for customers is that it portrays your organization as professional and safety-conscious. Through this certification, your company exhibits meticulous handling of confidential data, which is endorsed by all levels of your organization.

Improved Market Position: In various industries, ISO 27001 is increasingly becoming a prerequisite for clients. Holding the certificate attracts more reputable customers, enhancing your organization’s standing. Beyond its commercial implications, governmental regulations concerning information security are growing more stringent. ISO 27001 certification serves as essential documentation for participating in (European) tenders and securing government contracts.

Structured Information Security System: ISO 27001 standards necessitate the implementation of an Information Security Management System (ISMS). The protocols and procedures developed within this system, such as process descriptions, reports, and records, provide your employees with a framework to follow. ISMS encourages your organization to approach information security systematically and maintain a culture of critical thinking.

Commitment to Continuous Improvement: With an ISO 27001 certification, your organization demonstrates an ongoing commitment to information security. It operates in line with the PDCA cycle (Plan, Do, Check, Act), continually monitoring security measures and making necessary enhancements. This approach reflects your dedication to staying vigilant and adapting to evolving security challenges.

Third-Party Risk and ISAE 3402

From comprehensive outsourcing of intricate functions like Infrastructure as a Service (IaaS), Platform as a Service (PaaS) services, or component manufacturing to modest contracts with local service providers and suppliers, organizations spanning various sectors and scales place significant reliance on third-party service organizations.

Engaging in outsourcing activities yields benefits such as cost reductions, operational efficiencies, and the infusion of specialized expertise into the organization. However, outsourcing also broadens the spectrum of potential risks an organization must contend with. In light of this, comprehending, evaluating, and adeptly addressing these risks as part of an enterprise risk management (ERM) framework is imperative to mitigate the exposure to financial losses, regulatory non-compliance, and reputational harm.

Gaining Insight into Third-Party Risk: It’s important to note that third-party risk isn’t exclusive to multinational corporations that outsource major business functions to offshore vendors. In the contemporary business landscape, most organizations regularly interact with service organizations as an integral aspect of their day-to-day operations, as previously discussed. Even smaller enterprises rely on service organizations for diverse activities, ranging from server hosting and IT support to salary processing. The growth of third-party outsourcing inherently heightens the potential risks to which organizations are subject.

The continuous analysis of third-party risk at any given juncture holds significance for ensuring business continuity and optimizing the effectiveness of risk management endeavors. Given the considerable reliance on data across most businesses, any third party granted access to sensitive or confidential information may potentially pose a risk to business continuity. Just as in other risk categories, outsourcing risks can be evaluated based on degrees and hierarchies. These hierarchies and degrees constitute the foundation for risk prioritization by management and shape the risk framework presented in an ISAE 3402 | SOC1 report.

Prioritizing Risks and ISAE 3402: It’s crucial to recognize that prioritizing risks is an ongoing process. All parameters should be adaptable over time, influenced by factors ranging from economic shifts to changes in the regulatory landscape and evolving strategic initiatives. While this is not an exhaustive list, service organizations that generally entail a higher degree of risk for your organization include:

  • Cloud computing/on-demand computing
  • Software-as-a-Service (SaaS)
  • Internet service providers (ISPs)
  • Credit card processing platforms
  • Online order fulfillment
  • Data center and co-location providers
  • HR and payroll services
  • Third-party administrators (TPAs)
  • Print and mail services
  • Third-party logistics (3PL) services
  • Accounts receivable processing and debt collection services
  • Third-party due diligence

Conducting thorough due diligence before entering into a new third-party contract serves as a foundational step. Similar to enterprise risks, third-party risks should be consistently and proactively managed throughout the duration of a vendor relationship, given that parameters evolve with time. This approach entails harnessing the capabilities of internal audit, finance, legal, and, in many instances, independent auditors capable of providing an ISAE 3402 assurance opinion.

Securance is well-equipped to assist you in achieving compliance with ISAE 3402, SOC 1, ISAE 3000, SOC 2, ISO 27001, and ISO 9001. Feel free to reach out to us for assistance or advice.

SOC 1 & SOC 2

The primary and widely used term for service organizations reporting on third-party risks to user organizations is the Systems and Organization Control Report, often referred to as the SOC report. This term was introduced by the American Institute of Certified Public Accountants (AICPA) as a replacement for the SAS70 framework.

Previously, these were known as Service Organization Control reports. SOC encompasses a suite of reports that originated in the United States. ISAE 3402 is aligned with the US Statement on Standards for Attestation Engagements (SSAE) 18 US standard. An ISAE 3402 report delivers assurance on a service organization’s system description and the appropriateness of its control design and operational effectiveness as presented in a Service Auditor’s Report.

ISAE 3402 | SOC 1: In an ISAE 3402 | SOC 1 report, organizations establish their own control objectives and controls and align them with customer requirements. The scope of an ISAE 3402 report typically includes all operational and financial controls that impact financial statements, as well as IT General Controls (e.g., security management, physical and logical security, change management, incident management, and systems monitoring). In essence, if an organization hosts financial information that could affect its client’s financial reporting, pursuing an ISAE 3402 | SOC 1 audit report is the most logical choice and is often requested. ITGCs, operational controls, and financial controls fall within the purview of an ISAE 3402 | SOC 1 audit.

SOC 1: In a SOC 1 audit, control objectives essential for accurately representing internal control over financial reporting (ICOFR) are required. Organizations subject to SEC filings in the United States typically include these objectives.

Given the importance of IT service providers, cloud service providers, and datacenter/housing providers as key suppliers to financial institutions, standards like SAS70, SSAE 18 SOC 1, and ISAE 3402 have gained significant prominence in the IT industry. They have become the most comprehensive and transparent standards for effective IT outsourcing and risk management. Organizations seeking an ISAE 3402 | SOC 1 report often contemplate ISAE 3000 | SOC 2 reports.

ISAE 3000 | SOC 2: In ISAE 3000 | SOC 2 reports, the Trust Services Principles and Criteria (TSPs) are applied. These TSPs consist of specific requirements developed by the AICPA and Canadian Institute of Chartered Accountants (CICA) to provide assurance concerning security, availability, confidentiality, processing integrity, and privacy. An organization can select the specific aspects that align with their customers’ needs. An ISAE 3000 | SOC 2 report may encompass one or more principles. When an organization handles various types of information for clients that do not impact financial reporting, an ISAE 3000 | SOC 2 report is more relevant. In such cases, clients are primarily concerned about the secure handling and availability of their data as stipulated in their agreements. A SOC 2 report, like a SOC 1 report, evaluates internal controls, policies, and procedures.

SOC 1 or SOC 2: Organizations that manage, process, or host systems or information affecting financial reporting should invariably provide an ISAE 3402 | SOC 1 report. ISAE 3000 | SOC 2 is suitable when all systems and processes are unrelated to financial reporting. Datacenter providers, Infrastructure as a Service (IaaS) providers, and Platform as a Service (PaaS) providers often issue hybrid reports, incorporating both an ISAE 3402 | SOC 1 for finance-related processes and systems and an ISAE 3000 | SOC 2 for unrelated processes and systems. The content of both reports is typically identical.