This is a simple question without an easy answer. Whether a vendor’s data security practices are appropriate depends on a lot of different factors – and we could devote an entire blog to analyzing each of them. The general principle is to ensure the breadth and depth of the vendor’s security obligations are aligned with the sensitivity of the data.

If the vendor will access or store protected health information (which is regulated by HIPAA), personally identifiable information or financial information (which is regulated by a variety of federal and state laws), or highly sensitive proprietary information or trade secrets, you will need a robust set of data security provisions in your agreement with the vendor. For example, the agreement should address (among other things):

  • Electronic controls for the software and your data (password protection of the application and vendor’s infrastructure, antivirus software, encryption requirements);
  • Physical controls for the vendor’s facilities (alarm systems, access logs, fire suppression systems);
  • Policies to limit access to your data to only those personnel with a need to know, who are subject to confidentiality requirements (and a process to revoke such access when the individual is terminated or no longer works with your data);
  • Requirements governing the vendor’s access to your systems (if, for example, they require remote access to your software or will be logging in to your networks);
  • Disaster recovery and data backup procedures to ensure data is protected in the event of a system outage, natural disaster or other emergency; and
  • Requirements for the vendor to test its systems for security holes and potential vulnerabilities.

Additionally, the agreement should specify the vendor’s obligations in the event of a breach (both in terms of reporting/investigating the breach and in terms of paying for the downstream costs/expenses associated with notifying the impacted individuals), and your rights during the agreement to audit the vendor’s compliance with the security requirements. You may also need to enter into additional contracts, such as a business associate agreement, to comply with applicable laws such as HIPAA.

On the other end of the spectrum, if the vendor will only receive public information of little or no sensitivity, a basic security provision (such as language that requires the vendor to implement and maintain commercially reasonable physical, technical and administrative security measures) may be sufficient. But be careful to think about the long-term: when thinking about the sensitivity of your data, don’t just look at the data you plan to provide the vendor on Day 1: make sure you take into account your plans over time, particularly if they involve moving increasingly sensitive information into the vendor’s software as your business grows.