While the cloud model for obtaining computing resources offers many benefits —  including its relatively low price compared to other models — it doesn’t come without a range of risks to manage. The following issues should be taken into consideration when negotiating an agreement with a cloud service provider.

Where Is Your Data?

A fundamental premise of the Cloud Model is that your data will be stored across several of the cloud service provider’s data centres. This raises a threshold question:  At any given point in time, will it be possible for you to know where your data actually resides?

This is not a trivial, or unimportant, question. If your organization is part of a regulated industry or if your organization, like a bank or hospital, handles personal information from consumer clients, not only will your CEO and Board of Directors likely want to know where your data is stored, but your government/public regulator will require that information as well.

Searching and Seizing Your Data?

If you know with some precision where your data is in the supplier’s cloud, you’ll better understand which jurisdiction’s search and seizure rules (including subpoena and similar laws) apply to your data. This is extremely relevant if your business is routinely under the scrutiny of a government or regulatory agency.

For example, you’ll want to understand how easily the regulator (or local government, or law enforcement) can seize your data from your supplier’s system. If your data will reside on facilities located in the US, you’ll want to understand how big a risk there is for search and seizure of data under the Patriot Act — though it may be less of a risk than you think.

Notice, But Not A Wall

Regardless of the actual rules in place in the country (or countries) where the cloud provider’s computer centres are located, if you do have personal information from your customers that will be hosted or processed in a country other than Canada, Canadian privacy law requires that you comply with some notification and other steps to move their data to a foreign country.

To date, privacy commissioners have interpreted these privacy laws in a manner that will not prevent sending the personal information of Canadians abroad (albeit under strict legal/contractual controls). In particular, the contract with the cloud service provider must stipulate that the provider will implement best practice security measures at the relevant data centres. This often includes citing specific security standards that the service provider must comply with. The contract should also include a set of very robust confidentiality/privacy/security provisions. Essentially, you want to make it clear that any deviation from the standard prescribed will result in a breach of contract by the service provider. The service provider should also expressly agree to comply with various privacy law requirements, including the obvious provision that it will not make use of the personal information except to provide service to you. Any other use would be a major breach of the agreement.

Limits on These Liabilities

Having suitable confidentiality, security and privacy undertakings in your agreement with the cloud service provider becomes much less meaningful if that same agreement comes with an overall limit of liability clause that severely cuts back what damages you can ultimately recover from the service provider if things go wrong and they breach your agreement.

To guard against this situation, it is fairly common to provide in the relevant contract that the general limit of liability clause (which covers scenarios such as the cloud service not being available for some period of time due to an unscheduled outage) will not apply to breaches of the privacy, confidentiality and security provisions of the agreement. Or, if not completely excluded from the limit of liability clause, at least breaches of these provisions should attract a higher liability limit from the supplier of the cloud service.

A Critical Service

Similarly, it is important to consider the quality of the cloud service, and what is to happen (not only legally, but also practically, from an operations perspective) if the service turns out to be sub-standard relative to what was initially promised by the cloud service provider.

For example, the supplier should agree that the service will be up and running (and available to your staff) either all the time, or at least virtually all the time (the latter is sometimes called a "five nines" service level, as it commits the service provider to being in full service mode 99.999 per cent of the time).

To give you a robust uptime guarantee, the cloud service supplier should have multiple data centres and a plan to have them each serve as back up sites to one another in case any one site is hit with an outage. To be prudent, ensure that the company indeed has such a back up plan, and that it tests this plan regularly (at least once a year). If the supplier doesn’t have such a back up plan, you should reconsider whether you should be entrusting your critical IT requirements to them.

Assuming the supplier does have a back up plan, and is therefore willing to commit contractually to reasonable uptime guarantees, you nevertheless also have to make sure your agreement addresses what happens if in any particular month the required service standard is not met. In some instances, you get a partial refund of your fees for the month where the level of service falls below this threshold. In other instances, you get to terminate the agreement on fairly short notice if the service level is missed. Keep in mind, however, that switching suppliers is harder than it sounds, making this a last resort, after other options have been exhausted.

Managing Technology Lock-In

At the outset of your relationship with a cloud service provider, make sure you carefully consider what would happen — or would need to happen — to your data for it to be moved to another service supplier. By thinking about this possibility beforehand, you may be able to avoid the difficult scenario of discovering, too late, that moving your data is an incredibly expensive exercise — or worse, that the new data format you want is not supported by your incumbent supplier.

Of course you can always just leave these issues to later, but it is much more prudent to understand the parameters of this process — and the attendant costs — at the beginning of the relationship.

Peeking Behind the Scenes

Another concern you may run into with cloud computing is that your internal audit staff (or your external auditors) likely will want to have the right to attend at the premises of the cloud services supplier to review various aspects of their operations (such as the security measures that are in place in order to get comfortable that they align with the standards in the agreement).

Sometimes suppliers are very touchy about giving your auditors access to their premises. Understandably, they are concerned that your staff’s access may disclose some other customers’ data to your people — something which the supplier must avoid at all costs.

The compromise is typically that your auditors can have access to the supplier’s premises, but on very controlled and highly supervised terms. Though it’s not a simple task, these terms should be carefully integrated into the body of the contract you are signing.

In conclusion, by all means explore taking advantage of the new cloud computing phenomenon, but don’t forget to manage the attendant risks through sensible amendments to the cloud service provider’s standard agreement.