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

During due diligence on a prospective cloud-based payment-processing vendor, a bank's analyst reviews the vendor's financial statements. The vendor derives 70% of revenue from a single customer, which recently announced it is moving to another provider. What is the most appropriate conclusion for the bank's due diligence?

Customer concentration with a pending loss of 70% of revenue is a financial viability red flag. The bank should analyze it further and require contingency and exit planning before proceeding, since the vendor's ability to keep delivering service is now in question.

  1. AIgnore it, as customer concentration is irrelevant to the bank's operational risk
  2. BTreat it as a financial-condition concern raising the risk the vendor cannot sustain service, and require further analysis and possibly contingency or exit planning before proceedingCorrect
  3. CConclude the vendor is acceptable because it has revenue today
  4. DReject all cloud vendors as a category

Explanation

Financial due diligence assesses the provider's viability, including revenue concentration. Losing a 70% customer threatens the provider's ability to deliver, so the bank should analyze further and plan contingencies. Ignoring it or rejecting the whole category are not risk-proportionate.

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