From outsourced services to supply chain management, there’s a whole plethora of scenarios where vendors may get access to your company’s data, and controlling how they use the data at their disposal is often riddled with an intricate web of difficulties.

Some vendors are less than forthcoming when it comes to revealing their data handling practices, making it tough for legal teams to ensure compliance with established policies and prevent misuse.

There's also an inherent risk of intellectual property violations, where legal teams have to worry about vendors potentially benefiting third parties (e.g., competitors) with company trade secrets.

Furthermore, enforcing data control measures can be resource-intensive, and in the face of budget constraints, the odds can get significantly skewed against the legal team.

This begs the question: How can legal teams efficiently manage vendors with access to company data?

Let’s find out.

The role of data in business-vendor relationships

Data has become an integral component of the modern business world, with more organizations leveraging its insights for operational and strategic purposes. 

Its proliferation into business has made it instrumental to modern business-vendor relationships, reshaping the dynamics of a company's engagements with its suppliers and service providers. 

The following are areas of business-vendor relationships where data is often beneficial.

#1 Vendor selection

At the basic level, organizations leverage data for due diligence procedures, vetting through a list of potential vendors based on data points like pricing, turnaround times (TAT), response rates, product quality, and more.

Also read: 6 Tips For Effective Vendor Contract Management

#2 Performance tracking

Data also plays a major role in performance analysis, helping organizations track KPIs and ensure their vendors meet agreed-upon service levels and quality standards.

#3 Demand forecasting

Accurate demand forecasting is essential for both suppliers and businesses. By sharing data, such as sales and inventory information, companies can collaborate with vendors to better anticipate demand fluctuations. This helps optimize inventory levels, reduce carrying costs, and ensure on-time deliveries.

#4 Inventory management

Data-driven inventory management facilitates just-in-time (JIT) inventory practices. Vendors can access real-time inventory data, ensuring businesses have the right amount of stock at the right time. This reduces excess inventory costs and minimizes stockouts.

#5 Collaborative planning

Data fosters collaboration between businesses and their vendors. By sharing sales forecasts, production schedules, and inventory data, both parties can align their operations more effectively. This collaborative planning minimizes disruptions and ensures a smoother supply chain.

Also read: Managing Contract Performance—Tips + Tools for Success

In what scenarios do vendors typically have access to company data?

As already established, data plays an increasingly significant role in business-vendor relationships, fostering better collaboration and outcomes for both parties.

However, the type and amount of company data accessible to vendors can vary widely depending on the nature of the vendor's relationship with the business and the specific services or products being provided. Let’s look at the various situations that may warrant access to company data and what kind of data vendors may be exposed to.

#1 Outsourced services

Companies can sometimes outsource certain functions like IT support, human resources, customer support, or accounting services to third-party vendors. These vendors often get access to company data, some of which are necessary for their operations.

For instance, IT support services may have access to system logs, events data, user accounts, hardware and software inventory, email and communication data, and various database content.

Customer support service providers often get access to customer data, including contact information, purchase history, product specifications, etc.

Financial and accounting services may get access to financial records like invoices, bank statements, tax records, payroll data, and more.

#2 Cloud services

Companies often work with cloud service providers (CSPs) like Google Cloud Platform (GCP), Microsoft Azure, or Amazon Web Services (AWS) to host their virtual servers, storage, and networking infrastructure in the cloud.

While reputable CSPs are very strict about data security and privacy, a wide variety of company data can be accessible to them. These include usage data, user account information, business files, backups, configuration data, and various database content.

#3 Supply chain and logistics

Companies may sometimes collaborate with third-party vendors and suppliers to source materials, manufacture products, store inventory, and deliver goods to customers. In cases like this, they often share crucial data with these vendors.

These may include data about their current stock levels (for inventory management and supply), customer contact details (for delivery), and demand forecasts.

#4 Consulting and advisory services

If a consulting firm is hired to provide strategic advice or insights, they may need access to your company's data to analyze operations and make recommendations.

The nature of data accessible to consultants depends on their expertise and the service they have been paid to provide.

For instance, an operational consultant may require access to internal process documents, workflow charts, and performance metrics to evaluate the efficiency of existing operations.

Financial consultants may require access to detailed financial records, budgets, and forecasts to provide advice on financial planning, investment decisions, and cost management.

Furthermore, consultants guiding organizational change initiatives may require access to employee data, organizational charts, and communication records to develop change management strategies and plans.

What are the challenges legal teams face with managing vendor data usage?

The role of legal teams in controlling and managing how vendors use company data cannot be overemphasized. However, there is a plethora of challenges associated with this responsibility, from lack of transparency and intellectual property concerns to vendor subcontracting and risks of data misuse.

Let’s get into more detail below.

#1 Lack of transparency

Vendors may not be sufficiently transparent about their data handling practices, including data retention frameworks, security protocols, and usage policies. This makes it difficult for legal teams to assess the scope of data usage and evaluate the vendor’s compliance with necessary security standards.

Even if vendors initially provide transparency into their data handling practices, these practices may change over time without adequate notice to the company. Changes could include modifications to data processing techniques, the introduction of new technologies, or alterations in subcontractor relationships.

#2 Risk of intellectual property violations

The safety of intellectual property is a top priority for legal teams. However, there’s often an inherent concern around the potential misuse or unauthorized disclosure of trade secrets or proprietary technology by vendors during the course of their relationship with the company.

Vendors often work with other companies, some of which may be competing with your organization. Monitoring and ensuring that your organization's data is not used to benefit these third parties can be a complicated process.

Also read: Effective Contract Risk Management: Top Tips & Strategies - SpotDraft

#3 Concerns around vendor subcontracting

When vendors subcontract parts of their services, they may give their subcontractors access to some of their resources, including data from the primary company. When this happens, there is often an elevated risk of misuse and unauthorized exposure as legal teams find it more difficult to track and control how third parties use company data.

Legal teams often have a direct contractual relationship with the primary vendor and may not have direct visibility into or control over the subcontractors chosen by the primary vendor. This can create uncertainty regarding who has access to the company's data and how it's being handled.

#4 Non-compliance to data protection regulations

In many cases, companies are subject to data protection standards like GDPR (General Data Protection Regulation), CCPA (California Consumer Privacy Act), or HIPAA (Health Insurance Portability and Accountability Act). Per these standards, vendors are typically considered data processors and must comply with stipulated regulations when handling the company's data.

However, vendors with questionable data handling practices have a high chance of non-compliance, and in cases of data leaks or misuse, the organization risks getting roped into the mess, facing legal penalties and reputational damages.

 “Your company may be a model of best practices with respect to data collection and data privacy.  But, if you use vendors to process any of the data (e.g., the cloud, call centers, outsourcing, etc.) you are still responsible and your company will be the one left holding the bag in the event of problems.”

~ Sterling Miller, CEO and Senior Counsel, Hilgers Graben PLLC
Ten Things: Data Privacy - The Essentials

Also read: What is Contract Compliance? The Ultimate Guide - SpotDraft

#5 Vendor liability

Establishing vendor liability for data breaches or other violations can be complex, even for experienced legal professionals. First, they'd need to infuse the right liability clauses into vendor contracts, taking jurisdictional coverage into account. However, jurisdictional laws can change at any time, and reflecting these changes in existing vendor contracts may require another round of time-consuming negotiation.

Even when liability terms are clearly defined in contracts, enforcing these can be a lengthy and costly process, especially when dealing with uncooperative vendors.

Moreover, while there's a great need for solid liability provisions in the company's interest, legal teams must also balance this with the imperative of maintaining healthy business relationships with the company's vendors. This, indeed, is often difficult to achieve.

Best practices to improve how vendors use your company’s data

Legal teams play a mission-critical role in ensuring that vendors use company data securely and productively. While this is not exactly a cakewalk, it is completely doable. In this section, we discuss key strategies to keep in mind to minimize risks and maximize productivity.

#1 Conduct thorough vendor due diligence

Before onboarding any vendor, perform a comprehensive due diligence process. This includes assessing their data handling practices, security measures, and compliance with data protection regulations. Check the vendor's reputation and track record, and consider their experience with data privacy and security.

#2 Fortify your contracts with the right clauses

Include specific data protection and privacy clauses in your contracts. These clauses should outline the vendor's responsibilities regarding data security, confidentiality, and compliance with relevant laws.

Ensure you cover critical areas like intellectual property, data retention, ownership, usage rights, subcontractors, liabilities, transition policy, audit rights, and more.

Also read: 5 Most Negotiated Terms and Clauses in a Contract

Clearly state the consequences of data breaches or non-compliance, including potential financial penalties and termination of business engagement.

Pro tip: Use a Contract Lifecycle Management (CLM) system to streamline your entire contract management process, from contract generation and negotiation to execution and tracking. 

SpotDraft CLM comes with robust contract templates fortified with various clauses and automated workflows to help you expedite all contracting processes and mitigate risks at scale.

#3 Ask for Data Protection Impact Assessments (DPIAs)

DPIAs are designed to help vendors and organizations identify and minimize privacy risks associated with data processing activities. Requesting DPIAs from vendors is a proactive way to ensure your company's data is protected and used in compliance with relevant regulations.

Make it a contractual requirement for vendors to conduct DPIAs for data processing activities involving your company's data and carefully review their DPIA reports to ensure they have identified and addressed potential data-related risks effectively.

Also read: In-House Legal Guide to Safeguarding Company Data

#4 Stay in touch with the vendors on data-related issues

Schedule periodic meetings with vendors to share insights and concerns regarding activities that involve company data. Also, ensure you keep them regularly informed about changes in jurisdictional and industry regulations before modifying the contracts.

Establish a clear process for vendors to report data breaches or incidents immediately and outline escalation procedures in case of disputes or unresolved data-related issues.

#5 Implement robust access control mechanisms

You need to keep access to company data minimal, making sure that vendors can access only the data they need to do their jobs.

Implement strong authentication methods for sensitive data and assign permissions based on roles and responsibilities to limit access to necessary data. Also, ensure the company data is encrypted at rest and in transit to keep it safe from unauthorized access and exposure.

“One way companies are starting to take risk out of a potential data breach is to encrypt the data.  If encrypted data is lost or stolen (and the key is not taken too) most data breach notification statutes do not require any notice as the encrypted data is otherwise considered safe.”

~ Sterling Miller, CEO and Senior Counsel, Hilgers Graben PLLC
Ten Things: Data Privacy - The Essentials

Wrapping up

Data has indeed transformed the landscape of business-vendor relationships, ushering in a new era of interconnectedness and collaboration. But its proliferation has also brought along a new frontier of challenges and risks, from data misuse concerns to complexities around vendor liability.

However, by implementing the tips discussed above, you will not only ensure your company's data is protected from misuse but also ensure vendors utilize it productively.

Want to see how SpotDraft can help you draft the best contracts for your engagement with your vendors? Request a demo.