Outsourcing to the Cloud

by Ervin Cohen & Jessup LLP

As many companies turn to cloud computing as a means of increasing accessibility and saving costs, you should consider a variety of risks which require thoughtful planning before moving your data to “the cloud.”

Outsourcing to third-party cloud providers is particularly attractive in cutting IT spending, but often presents more vulnerabilities than maintaining your own secure infrastructure.  Any company considering outsourced cloud computing must begin with a disciplined risk management approach.  First, the company must ensure the security of its trade secrets and internal financial and business information.  Also, myriad Federal and state laws impose requirements designed to protect a variety of sensitive financial, medical and other personal consumer information.  This blog post addresses but a few of the critical issues that should be considered before deploying an outsourced cloud.

The term “cloud” is often used as a marketing “buzz word” to label a broad spectrum of models for delivery of real-time IT resources over the Internet.  As of September 2011, the National Institute for Standards and Technology (NIST) defines “Cloud Computing” as “a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources . . . that can be rapidly provisioned and released with minimal management effort or service provider interaction.” (emphasis added)  In outsourcing to a cloud, the “shared pool of resources” generally consists of company data and software maintained by a contracted third-party provider.

Privacy and security is the primary concern of outsourcing any cloud infrastructure, especially in legal compliance.  Sensitive data may be governed by certain laws such as the Health Insurance Portability and Accountability Act (HIPAA) for medical information; the Gramm-Leach-Bliley Act (GLB Act) for financial information; and the enforcement jurisdiction of the Federal Trade Commission over many kinds of personal information.  The HIPAA and the GLB Act require that companies handling sensitive health or financial information of their customers must protect and limit their use of such data, and must impose specific contract provisions on any third party service providers with whom they share such information.  Some Federal and state laws require secure encryption, segregation and deletion of certain classes of sensitive information.  Because many cloud providers allow servers and networks to be shared by more than one customer, a business must make sure their third-party provider will maintain company data in accordance with all applicable laws before deploying a cloud infrastructure.

As companies turn to cloud providers to handle their sensitive business data, determining the reliability of the provider and monitoring the security and availability of company information is a critical risk management responsibility.  Deploying critical resources over a cloud risks a total operations shutdown in the event of system failure.  Even worse, a permanent loss of company data, or even a period of interrupted access, could result in lawsuits or even bankruptcy.  While most cloud providers boast redundancy and backup of data, a prudent business should (1) complete careful due diligence before choosing a cloud provider, and (2) have in place a disaster recovery and business continuity plan in the event of a possible cloud failure.

An often overlooked, but increasingly important, legal issue regarding cloud outsourcing is jurisdiction and applicable law.  For example, assume a company (“CalCorp”) has its executive office in, and is incorporated in, California.  CalCorp, however, now deploys all of its operational software and data through its outsourced cloud servicer whose physical facilities are in Illinois.  This raises issues as to which jurisdiction’s laws apply to the data with respect to privacy, security, auditing and other compliance laws and regulations.  There are also concerns with information crossing state borders, even more so if the cloud is based in a foreign country.

These are just a few of the risks that must be evaluated before outsourcing a cloud infrastructure.  To reduce the vulnerability inherent in outsourcing your data to a third party cloud provider, your company should first undertake in a full risk management analysis.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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