Managing concentration risk and exit requirements: A framework for financial institutions

Cloud computing and AI have become the foundation for growth and competitive differentiation in financial services. AI-powered decision making, scalable compute, and modern data platforms are redefining how banks, insurers, and capital markets firms operate and innovate.  

Yet as organizations deepen their partnerships with major cloud and AI providers, regulators and executives alike are sharpening their focus on concentration risk, the concern that reliance on a relatively small number of technology providers might create critical business vulnerabilities. 

Rather than viewing cloud dependency as a threat, forward-looking leaders regard it as an important facet of modernization. The challenge is not to avoid concentration; it is to manage it intelligently, helping a firm maintain control, enhance resilience, and remain flexible amid changing conditions.  

For financial services firms in many jurisdictions, exit planning—a structured process to safely disengage from critical providers—has moved from a theoretical consideration to a regulatory expectation and an important component of operational resilience. 

Managing risk and exit planning in an evolving landscape 

Concentration risk has long been framed as systemic exposure (“What if a key provider fails?”), prompting regulators to mandate exit plans that assume full termination. In theory, this seems straightforward; in practice, it rarely is. 

Modern financial institutions operate in a deeply interconnected ecosystem where critical third-party providers are embedded in core operations and strategic innovation. These partnerships go beyond simple outsourcing; they often underpin transformation initiatives and are key to resilience when managed well by the organization. As a result, in highly integrated environments, full disengagement may be operationally complex and unlikely in practice, but firms are still required to maintain feasible, risk based exit plans. 

In this regard, Microsoft has introduced important capabilities (such as standardized architectures, diversified cloud regions, and built-in failover options) that customers can incorporate into their resilience and exit planning strategies. They can effectively reduce dependency risk for critical services and ensure continuity, but they stop short of enabling a full provider exit. Regulators increasingly acknowledge that perfect exits are not always technically or economically feasible. What they require are proportionate, well tested plans that reflect operational reality. The priorities are transparency, control over critical workloads, and pragmatic dependency management.  

Against this backdrop, regulators are recalibrating expectations, focusing on actionable, tested strategies rather than theoretical full exits. Two major frameworks illustrate this shift: 

• The European Union Digital Operational Resilience Act (DORA): Requires institutions to maintain tested transition plans that enable the removal or migration of contracted information and communication technology (ICT) services and data.
• The United Kingdom Prudential Regulatory Authority (PRA) SS 2/21 and the Critical Third Party (CTP) oversight regime: Requires firms to maintain documented and tested exit strategies for any “material” (such as critical and high-impact) outsourcing arrangement, with clear definition of roles, responsibilities, and continuity plans. 

Both frameworks emphasize proportionality, focusing on critical or important business functions, and integration into broader business continuity and resilience of governance.  

Integrating exit planning within a broader resilience strategy 

Exit planning is no longer optional, it is a compliance essential. Fortunately, given the complexity of today’s hybrid and multi-cloud environments, regulators do not expect “perfect” exit plans. Instead, they encourage risk-based, practical, and tested practices that dovetail with broader efforts.  

Exit planning should be embedded within a comprehensive, structured approach to strengthen operational resilience. To support such an integrated approach, Microsoft has developed a six-step resilience framework that aligns closely with the requirements of DORA: 

1. Update cloud risk governance: Systematically review policies and controls to ensure that cloud adoption aligns with business priorities, regulatory requirements, and risk tolerance.
2. Identify concentration: Specify critical third-party and indirect nth-party dependencies, such as a vendor’s suppliers, subcontractors, or technology partners. 
3. Assess alternatives: Evaluate potential providers and exit strategies—comparing cost, resilience, and compliance to ensure continuity and mitigate concentration risk before making final decisions. 
4. Design for resilience: Plan systems and recovery processes that can withstand disruptions from hardware failures and service outages, recover quickly, and maintain critical operations. 
5. Test business continuity plan: Prepare for loss of a data center or region, or long-term failures, with regular testing that identifies gaps and validates recovery procedures. 
6. Prepare exit plans: Develop and test detailed exit strategies—including timelines, resource allocation, and contingency measures—to ensure seamless provider transition and maintain compliance under stress scenarios. 

This integrated approach ensures that exit plans remain both practical and sustainable, and do not exist in isolation. Ultimately, exit planning is part of a larger system of controls and safeguards, evolving alongside the business’s cloud and AI innovation cycles. 

Enhancing exit planning with guidance and tools from Microsoft 

Recognizing the criticality of continuity, reversibility, and secure data transfer in financial services organizations, Microsoft has developed a comprehensive framework of contractual commitments, technical solutions, and support services to empower firms to manage exit scenarios with confidence and control. 

For example, if a regulator intervenes in a company’s operations, Microsoft is committed to granting the regulator full administrative control over the institution’s cloud environment. In cases of reorganization or acquisition, Microsoft enables the assignment or transfer of service rights to successor entities, ensuring that critical services remain uninterrupted. Importantly, Microsoft will not suspend or terminate services solely due to a transfer of rights, provided contractual obligations are met, and offers flexible service extensions to facilitate smooth transitions and data retrieval. 

Beyond contractual measures, Microsoft equips customers with a suite of advanced technical tools to support seamless data migration and workload portability. These include:  

• Azure Arc, a bridge that enables hybrid and multi-cloud management, letting firms extend Microsoft Azure services to on-premises or other clouds for flexible migration and reduced concentration risk.
• Containerization and portability: Using containers (such as Azure Kubernetes Service and Docker) and microservices makes applications portable—simplifying workload transfers between Azure and other environments.
• Automated data migration: Built-in tools like Microsoft Azure Data Factory automate extract transform-load (ETL) processes, streamlining bulk data migration during exit events.
• Microsoft 365 data management, provided with Microsoft Purview and other solutions, to provide key capabilities, including:
  • eDiscovery tools that can export emails, documents, and collaboration data in standard formats for easy transfer.
  • Backup solutions to create point-in-time snapshots, supporting reversibility and continuity.
• Hybrid, private, and sovereign cloud options for Microsoft Exchange, SharePoint, OneDrive, and Skype for Business enable migration across platforms. 

By combining clear contractual safeguards, advanced migration tools, and ongoing investment in hybrid cloud and open APIs, Microsoft empowers financial institutions to plan and execute exit strategies that align with regulatory mandates and business objectives. Exit planning then becomes a proactive process, one that safeguards business continuity and regulatory compliance at every stage of the cloud journey. 

Learn more 

• For an in-depth analysis, download our whitepaper, “Addressing concentration risk and building practical exit strategies for Microsoft Cloud.”
• Read more about our approach for managing operational risk in financial services on Microsoft Learn.
• Visit our blog for stories of how Microsoft for Financial Services helps firms accelerate business value.

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Source: Microsoft Industry Blog