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FRM Part II · FRM Exam Part II · Guidance on Managing Outsourcing Risk

A bank assesses its outsourcing portfolio and finds that 70% of its critical outsourced services are supplied by one provider, which is also hard to substitute. Which response best addresses this concentration while remaining practical?

The best response is to diversify where feasible, set concentration limits or monitoring triggers, and strengthen exit and contingency plans. Good past service does not remove single-provider risk, while abrupt termination or deeper reliance would either cause disruption or increase the concentration.

  1. ADo nothing since the provider has met all service levels
  2. BTerminate all contracts immediately regardless of disruption
  3. CDiversify where feasible, set concentration limits or monitoring triggers, and strengthen exit and contingency plansCorrect
  4. DIncrease the provider's share to negotiate lower prices

Explanation

Sensible management combines measuring concentration, setting limits or triggers, diversifying where feasible and strengthening exit planning. Past service levels do not remove the single-point risk, abrupt termination creates operational risk, and increasing share worsens concentration.

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