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

An SLA for an outsourced KYC screening vendor reports that 98% of cases are processed within the target time, but the bank's risk team finds that the 2% of late cases are all high-risk customers. What is the best conclusion?

The SLA should be redesigned so metrics are segmented or risk-weighted, because a strong overall percentage hides that all late cases are high-risk customers. Service levels must reflect the risk the bank actually bears, not just aggregate averages.

  1. AThe SLA is adequate because the headline metric exceeds the target
  2. BThe SLA metrics should be redesigned to reflect risk-weighted or segmented outcomes, not just averagesCorrect
  3. CThe vendor should be terminated immediately
  4. DThe metric should be dropped because KYC cannot be measured

Explanation

Aggregate metrics can mask concentration of failures in the most important segment. Good SLAs align indicators with the bank's risk and criticality, so segmenting or weighting is appropriate. Immediate termination is disproportionate.

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