I'm not sure if you're expecting something like this.

CREATE TABLE PSITableFinal

(DivisionRegion char(1),

PSIYear char(4),

PSIMonth char(2),

PSIKey int,

PSIOutcome int)

INSERT INTO PSITableFinal VALUES

('A','2014','01',2,1),

('A','2014','02',2,0),

('A','2014','03',2,0),

('A','2014','04',2,0),

('A','2014','05',2,0),

('A','2014','06',2,0),

('A','2014','07',2,0)

DECLARE @Month char(2) = '07',

@Year char(4) = '2014'

SELECT COUNT(*)

FROM [PSITableFinal] f

WHERE PSIYear = @Year

AND PSIMonth <= @Month

AND PSIOutcome = 0

AND PSIMonth >= ( SELECT MAX(x.PSIMonth)

FROM [PSITableFinal] x

WHERE x.PSIYear = @Year

AND x.PSIMonth <= @Month

AND x.PSIOutcome > 0)

--Change the value for July to test both cases.

UPDATE [PSITableFinal] SET

PSIOutcome = 1

WHERE PSIYear = @Year

AND PSIMonth = @Month

SELECT COUNT(*)

FROM [PSITableFinal] f

WHERE PSIYear = @Year

AND PSIMonth <= @Month

AND PSIOutcome = 0

AND PSIMonth >= ( SELECT MAX(x.PSIMonth)

FROM [PSITableFinal] x

WHERE x.PSIYear = @Year

AND x.PSIMonth <= @Month

AND x.PSIOutcome > 0)

GO

DROP TABLE [PSITableFinal]