Drawbacks and risks of virtual data rooms
Table of content
Amidst rising cyber threats, virtual data rooms (VDRs) are crucial, especially during processes such as mergers and acquisitions (M&A) and other complex financial transactions where lots of confidential data is shared.
However, while providing all the services and features a user might need for data security, the use of virtual data rooms can still pose risks if not approached appropriately.
In this article, we explore the main VDR drawbacks and list the most common virtual data room risks.
Common drawbacks of using virtual data rooms
Virtual data rooms ensure straightforward and effective data-sharing during complex financial transactions such as M&A or due diligence processes. But even more importantly, virtual data room software enables secure sensitive data storage, distribution, and collaboration.
However, improper use or a weak understanding of why you need a virtual data room could have VDR drawbacks.
Drawback | Risk type | Description |
Cost considerations | Financial | Virtual data rooms can be expensive, with some providers charging hidden fees for additional features like paid integrations, storage, or user licenses. This is especially relevant for small businesses. |
Onboarding challenges | Operational | The onboarding process for VDRs can be time-consuming, especially for teams unfamiliar with the technology, requiring extensive training, slowing workflows. |
Learning curve | Efficiency | The complexity of some VDR platforms may require users to invest significant time in learning how to use advanced features, delaying project or deal completion. |
Customization data room limitations | Flexibility | Some VDR platforms offer limited customization options, making it difficult to tailor the interface or features to specific project needs. |
Performance issues | Technical | Large file uploads, slow download speed, or platform downtime can hinder the smooth exchange of documents, affecting deal or project timelines and productivity. |
If not managed properly, these issues could pose a risk to the efficiency and cost-effectiveness of using virtual data rooms, especially in high-stakes M&A or legal transactions.
When choosing a virtual data room provider for your organization’s needs, you should consider ones that can address as many of these issues for you as possible.
There are additional virtual data room risks, particularly in relation to security and operations.
Security risks
Though virtual data rooms are the ultimate solution when it comes to the security of confidential business data, inappropriate approaches to security measures might lead to VDR data breaches.
These are the main virtual data room security risks to consider:
- Vulnerabilities to hacks and data leaks
During the first half of 2024, more than 1 billion internet users fell victim to data breaches. At the same time, the cost of an average data breach keeps rising. It’s already estimated at $4.88 million, which is a 10% increase year-on-year. Virtual data rooms can be vulnerable to cyberattacks too, if they lack advanced encryption, multi-factor authentication (MFA), or other protective measures. Hackers may exploit software vulnerabilities or poor security practices, leading to unauthorized access or data leaks. As VDRs are often used in high-stakes transactions like M&A, the data stored is highly valuable. This makes VDRs attractive targets. - Improper VDR user access control management
If VDR administrators fail to apply the “least privilege” principle when managing access controls, unauthorized users may gain access to confidential files. For example, if a junior employee is accidentally granted admin rights, they could access files that are not meant for them to view and potentially leak sensitive documents, whether unintentionally or maliciously. - Compliance risks
Virtual data rooms must comply with various legal and regulatory frameworks, such as GDPR or HIPAA. Failure to comply can result in fines or legal action. If a VDR provider doesn’t implement the necessary security and privacy features, users may unknowingly violate these regulations, exposing themselves to significant penalties. - Third-party tool management challenges
Many virtual data room providers integrate third-party tools for enhanced functionality, such as document management, communication features, or workflow automation. While these integrations improve productivity, they may also bring potential security risks if the third-party vendors are compromised or lack strong security protocols.
Operational concerns
Sometimes, the use of a virtual data room can cause certain operational difficulties or disruptions. The most common operational risks are:
- Data migration challenges
Some VDRs may store data in proprietary formats or organize it in ways that are incompatible with other platforms. That’s why migrating data can involve manual reorganization or conversion, which is time-consuming and error-prone. Additionally, important metadata (such as timestamps, document access logs, version history, or permissions) may not transfer correctly during migration. This can result in lost context, hindering audit trails, and increasing risks for legal compliance. - Risks of being dependent on a single vendor
If a company becomes too reliant on one VDR provider, it may face significant challenges when switching to another service. There could be high switching costs, complex data migration, or contractual restrictions. What’s more, a single vendor can raise prices or modify service agreements once its solution is deeply integrated into the company’s platform, leaving the latter with little leverage. - Downtime and data room accessibility issues
Sometimes, especially during the migration process, critical business data might not be available to users, causing operational delays. Also, unexpected technical difficulties can prolong the migration period, disrupting business continuity.
Human factor risks
68% of data breaches include a non-malicious human element, meaning these incidents involve an insider human error, such as clicking the phishing link. Unfortunately, even the best virtual data room that takes robust security measures to protect sensitive data can’t ensure 100% data protection from human factors.
Some of the most common human factor risks are as follows:
- Accidental data deletion
Human error can lead to the unintended deletion of critical files or folders, which might result in permanent data loss if proper backups aren’t in place. - Human error during data upload
Uploading outdated, incomplete, or inaccurate documents due to a lack of version control or attention to detail can mislead decision-makers and create operational inefficiencies. - Insider threats
Employees with malicious intent, especially those with elevated permissions, can purposefully leak, modify, or delete confidential data. This can have severe consequences, including legal liability or competitive damage.
Mitigating risks and addressing drawbacks with iDeals
iDeals provides a secure infrastructure, offering robust security features that help users overcome potential VDR challenges and mitigate risks.
Service | Description |
Multi-layered data encryption | Ensures that all files with sensitive information are transferred with high-grade TLS protocol and encrypted at rest with 256-bit AES keys. |
Two-factor authentication | Adds an extra layer of security by requiring users to verify their identity via SMS code before granting access to the platform. |
Eight levels of granular access controls | Allows administrators to set detailed permissions for each user, ensuring that only authorized individuals can view, download, or edit sensitive documents. |
Digital watermarking | Automatically adds digital watermarks to documents viewed or downloaded, helping track and prevent unauthorized sharing. |
In-built redaction | Blacks out certain areas of the document, image, or text so that they’re not visible to VDR users. Particularly useful for protecting personally identifiable information or other critical business data. |
Audit trails | Provides detailed reports on who accessed which documents, when, and what actions they took, allowing for full accountability and monitoring. |
Data backup and disaster recovery | Maintains regular backups and offers disaster recovery plans to ensure data is protected from loss or corruption. |
Secure viewing | Restricts access to documents by providing options such as view-only mode, preventing unauthorized downloads or printouts. |
Comprehensive user training | Offers resources to educate users on how to maintain the best security practices within the data room, minimizing human error. |
Impeccable customer support | Provides immediate assistance 24/7 via three channels (email, phone, and chat), ensuring swift response to any potential threats or concerns. |
Visit our Help Center to learn more about how we approach user data management and security.
Key takeaways
- While offering a secure space for confidential data sharing, the use of virtual data rooms sometimes comes with certain risks and drawbacks.
- These include onboarding challenges, operational concerns, performance issues, security risks, cost considerations, or human factor issues.
- However, when approached correctly, these risks can be mitigated by the right virtual data room providers, offering a variety of dedicated tools, services, and training possibilities.
- In conclusion, virtual data rooms like iDeals take all possible precautions to mitigate the possible risks of using VDRs.
FAQ
The most common disadvantages of virtual data rooms are cost considerations, onboarding challenges, the learning curve, customization limitations, or performance issues. Inappropriate use of virtual data rooms can also pose security, operational, or human factor risks.
A virtual data room is considered a highly secure online repository for storing and sharing sensitive documents, critical business data, or personally identifiable information. This is due to dedicated VDR features that include but are not limited to watermarking, in-built redaction, granular access controls, and multifactor authentication.
The main advantages of virtual data rooms include enhanced security, streamlined collaboration, cost savings, facilitated decision-making, and improved workflows and project or deal management.
A virtual data room provides a secure cloud-based repository for sharing and storing confidential or sensitive data. Virtual data room administrators set certain access permissions for each user so that they only see what they’re allowed to see. Virtual data room services are especially helpful during such complex financial transactions as M&A, particularly the due diligence phase.
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