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

When designing key performance indicators for an SLA covering an outsourced operations function, which approach best supports effective ongoing monitoring by the bank?

The best approach is to use measurable, clearly defined metrics with set reporting frequency, thresholds, escalation paths and the bank's right to verify the data. This makes performance objectively assessable and enforceable, whereas vague or self-reported unverified measures and cost-only metrics do not support effective oversight.

  1. ARely solely on the provider's self-reported metrics without verification rights
  2. BUse measurable, clearly defined metrics with reporting frequency, thresholds, escalation paths and the bank's right to verifyCorrect
  3. CDefine metrics qualitatively, such as 'good service', to allow flexibility
  4. DLimit metrics to cost savings achieved by the provider

Explanation

Effective SLAs have objective, measurable service levels, defined reporting, thresholds that trigger escalation or remedies, and the bank's ability to audit or verify data. Self-reporting without verification and vague wording prevent enforcement. Cost-only metrics ignore quality and risk performance.

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