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

A regional bank outsources its payment processing to a single cloud-based provider. The board asks why an exit strategy must be documented before the contract is signed rather than after problems emerge. Which response best reflects sound outsourcing risk practice?

An exit plan is prepared in advance so the bank can transition a critical service to another provider or bring it in-house in an orderly way if the provider fails or underperforms. It complements continuity planning and does not shift accountability away from the bank.

  1. AExit plans are only needed if the provider is a related entity of the bank
  2. BAn exit plan lets the bank transition to another provider or bring the service in-house in an orderly way if the provider fails or performance deterioratesCorrect
  3. CDocumenting an exit plan transfers the legal responsibility for the service to the provider
  4. DAn exit plan replaces the need for a business continuity plan for the outsourced service

Explanation

Exit strategies are designed in advance so the bank can move the service to another provider or in-house without disrupting critical operations. The bank keeps accountability for outsourced functions, so exit plans do not transfer responsibility. They also complement, not replace, business continuity plans.

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