In today’s interconnected business world, organizations are increasingly relying on third-party service providers to perform critical functions (e.g., managed service providers, transaction processing, data center hosting, etc.) and the need to ensure that these providers maintain robust internal controls has never been more important. However, this reliance on external entities can introduce potential risks that organizations must manage effectively. One strategy for mitigating these risks is by leveraging Complimentary Subservice Organization Controls (CSOCs). In this Peak Post, we will dive into understanding CSOCs in third-party risk management and how they can help organizations ensure the security and operational excellence of their outsourced functions.
What are Complimentary Subservice Organization Controls
A subservice organization is an external entity engaged by a service organization to perform specific tasks or services on its behalf. These tasks or services are typically part of the overall service offering provided by the primary service organization to its clients. The primary service organization relies on the subservice organization’s expertise, resources, or infrastructure to deliver the services. Complimentary subservice organization controls, or CSOCs, are the set of controls implemented and performed by the subservice organization, which in combination with controls at the service organization, are necessary in order to achieve a control objective (SOC 1) or a trust services criteria (SOC 2).
Examples of subservice organizations and related CSOCSs include:
- Data centers: A service organization may rely on a third-party data center to host its servers, network infrastructure, or applications.
- Payment processors: A service organization might outsource payment processing to a specialized payment processor to manage transactions securely and efficiently.
- Cloud service providers: A service organization may use cloud-based infrastructure or software-as-a-service (SaaS) solutions provided by third-party cloud service providers.
- IT support and maintenance: A service organization might engage a subservice organization to provide ongoing IT support, maintenance, and system updates.
- Human resources and payroll services: A service organization could outsource HR functions, such as benefits administration or payroll processing, to a subservice organization.
The Importance of Complimentary Sub-Service Organization Controls
As organizations increasingly outsource critical functions, they need to ensure that their service providers have strong internal controls in place. The effectiveness of these controls can have a significant impact on the primary organization’s ability to manage risk, maintain regulatory compliance, and protect sensitive data.
Complimentary Subservice Organization Controls help to address this need by providing a means to assess the subservice organization’s internal controls. By implementing CSOCs, the primary organization can gain greater visibility into the subservice organization’s control environment and better manage the risks associated with outsourcing.
Monitoring Complimentary Sub-Service Organization Controls
Monitoring CSOCs is crucial for organizations to manage the risks associated with outsourcing critical functions effectively. By regularly monitoring these controls, organizations can ensure that their subservice providers continue to maintain robust internal controls, enabling them to identify potential issues early on and take appropriate action to mitigate risks.
1. Establish a Monitoring Framework
The first step in monitoring CSOCs is to establish a comprehensive monitoring framework that outlines the key controls to be monitored, the frequency of monitoring, and the monitoring methodologies to be used. This framework should be aligned with the organization’s overall risk management strategy and consider factors such as the criticality of the outsourced functions, the complexity of the services, and the potential impact on the organization’s risk profile.
2. Leverage SOC Reports
SOC reports, provided by the subservice organization, are a valuable resource for monitoring CSOCs. These reports offer insights into the subservice organization’s control environment, including the design and operating effectiveness of their controls. Organizations should review these reports regularly and use them as a basis for assessing the adequacy of the CSOCs in place.
3. Conduct Periodic Assessments and Audits
Periodic assessments and audits are essential for ensuring the ongoing effectiveness of CSOCs. These assessments should evaluate the subservice organization’s control environment, identify potential gaps or weaknesses, and recommend corrective actions where necessary. The frequency of these assessments should be determined based on the level of risk associated with the outsourced functions and the organization’s risk tolerance.
4. Foster Open Communication and Collaboration
Effective monitoring of Complimentary Sub-Service Organization Controls requires open communication and collaboration between the primary organization and the subservice organization. This includes discussing any changes to the subservice organization’s control environment, sharing information about potential risks, and working together to develop and implement appropriate controls.
5. Continuously Improve CSOCs
Monitoring CSOCs should not be a one-time activity but rather an ongoing process of continuous improvement. Organizations should regularly review the effectiveness of their CSOC monitoring framework, identify areas for improvement, and implement changes as necessary to ensure that their monitoring activities remain relevant and effective.
Understanding and monitoring CSOCs in third-party risk management is essential for organizations looking to mitigate the risks associated with outsourcing critical functions. By implementing a strategic approach to monitoring CSOCs, organizations can gain greater visibility into the subservice organization’s control environment, identify potential risks early on, and take appropriate action to mitigate these risks. In doing so, organizations can safeguard the security and operational excellence of their outsourced functions and maintain the trust of their customers and stakeholders.