Operational Risk Management is a process adopted for organizations looking to put into place real oversight and strategy when it comes to managing risks. Every business faces circumstances or fundamental changes in their situation that can be seen as presenting varying levels of risk to that business, from minor inconveniences to potentially putting its very existence in jeopardy.
Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events. As such, operational risk captures business continuity plans, environmental risk, crisis management, process systems, and operations risk, people related risks and health and safety, and information technology risks.
All of these risks need to be managed and the more sophisticated the approach to risk management, the more chance the business has to thrive and grow.
There is a huge variety of specific operational risks. By their nature, they are often less visible than other risks and are often difficult to pin down precisely. Operational risks range from the very small, for example, the risk of loss due to minor human mistakes, to the very large, such as the risk of bankruptcy due to serious fraud. Operational risk can occur at every level in an organization.
The type of risks associated with business and operation risk relate to:
- Business interruption
- Errors or Omissions by employees
- Product failure
- Health and safety
- Failure of IT systems
- Loss of key people
- Loss of suppliers.
Operational risks are generally within the control of the organization through risk assessment and risk management practices, including internal control and insurance.
Operational risk sources may be internal or external to the business and are usually generated by people, processes and technology. Identification is one of the most important areas of managing risk. Failure to identify risk will certainly mean that no action is taken to manage that risk. There are a number of different techniques that can be used to identify risk. A common method used in risk identification is the use of workshops to ‘brainstorm’. This can be used at different levels of the organization and can identify a large number of risks in a short time. To keep ideas flowing, it is important to keep identification sessions focused on identifying risks and not to move on to evaluate the risks. Operational risks are largely based on procedures and processes, so this lends itself to the use of audit for risk identification purposes. Risk based audit can be used as a tool to identify risks, as well as a method of reporting to the board on the effectiveness of the organization’s risk management framework.
Benefits of Operational Risk management
- Helps improve the reliability of a business operation
- Helps improve effectiveness of risk management operations
- Helps to strengthen the decision making process where a particular risk is involved
- Helps reduce losses by poorly identified risks
- Detection & early identification of unlawful activities
- Lower Compliance costs
- Helps reduce potential damage due to future risks
There are plenty more benefits along with a few challenges to any business process. Operational Risk Management is an essential step to avoid potentially damaging issues.
Stages involved in an operational risk management
These stages include
- Risk identification
- Risk Assessment
- Measurement & Mitigation
- Monitoring & Reporting
So to conclude this, we can clearly say that Operational Risk Management has 4 key principles
- Accept the risk when benefit outweighs the cost
- Accept no unnecessary risk
- Anticipate & manage risk by planning
- Make the risk decisions at the highest level