SOC 2 Terminology: Vendor vs Subservice Organization vs Subcontractor vs Third Party vs Nth Party

What's the difference between vendors, subservice organizations, subcontractors, third parties and nth parties in SOC 2 reports?

We’re very talented in business at having half a dozen different ways to say close to the same thing, yet when using them in context, you can completely change the meaning of each term.

Well, words matter! A lot of specific terminology is used throughout SOC reports. We often refer to vendors, subservice organizations, subcontractors, third parties and nth parties, but what do each of those terms represent?

Unless defined differently through internal policy, these are the widely accepted definitions and how to use them:

  • Vendor - A vendor is an organization that provides a company with goods or services. With a vendor, however, its controls are not necessary for a service organization to meet its service commitments or system requirements, when completing a SOC 1 or SOC 2 audit.
  • Subservice Organization: If a vendor’s controls are necessary for a service organization to meet its service commitments or system requirements when completing SOC 1 or SOC 2 audits, then that vendor is ‘upgraded’ to a subservice organization. The increased reliance on the vendor's controls is what classifies it as a subservice organization rather than a vendor.
  • Subcontractor: A subcontractor is an external individual with a specialized skillset to help perform tasks or projects (in this case, for a service organization) on a contract basis. A subcontractor is hired by a contractor, who is responsible for communication to the service organization. A subcontractor would report any issues or concerns to the contractor and, in turn, would report those issues or concerns to the client.
  • Third Party: A third party is similar to a vendor, but broader. It includes any external entity directly or indirectly involved in business. Thus, third parties can include vendors, customers, partners, regulators, consultants, etc. Unlike vendors, third parties may not always be directly involved in the exchange of good or services.
  • Nth Party: An nth party is any party beyond the immediate third party, such as a fourth party, fifth party, sixth party, etc. This is when a third party utilizes other entities to assist with the services that the third party provides to its clients. Different controls can be tested within a SOC report to verify that a company is performing the necessary monitoring procedures over vendors, subservice, subcontractor, third party or nth party.

How Can Schneider Downs Help?

Before embarking on the journey toward SOC 2 compliance, it's crucial to classify third parties and understand the key differences between them. Please visit our SOC 2 webpage for more information on how Schneider Downs can assist with SOC 2 compliance.

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