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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 vendor. The board asks which document should be in place so that, if the vendor fails or the contract is terminated, services can move to another provider or be brought in-house in an orderly way. Which item best meets this need?

A documented and tested exit strategy with transition plans is the right tool. It sets out how services move to another provider or in-house if the vendor fails or the contract ends, whereas penalties, longer terms or financial reviews do not provide an orderly route out.

  1. AA documented and tested exit strategy with transition plansCorrect
  2. BA longer initial contract term with automatic renewal
  3. CA service level agreement with higher penalty credits
  4. DAn annual vendor financial statement review only

Explanation

Guidance on outsourcing expects firms to have exit strategies and transition plans for orderly termination or vendor failure. Longer terms and penalty credits do not enable migration, and financial review alone only monitors, not provides a way out.

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