Operational risk is any risk stemming from your company’s business processes that could result in loss. This loss is not always financial; things like reputational risk also fall under this category. Operational risk management (ORM) is the art of protecting your company from these potential risks and minimizing any losses that may occur.
ORM began in financial institutions and became streamlined and codified over the years via the Basel Committee on Banking Supervision (BCBS). The concept of operational risk management quickly spread to other industries, and is now a regular component of many strategic risk management programs.
Operational risk is a broad concept. Examples can include anything from internal issues like employee misconduct or turnover among stakeholders, to external events like cybersecurity breaches or natural disasters. The common factor in all these events is their ability to affect your daily operations and create a risk of loss.
Understanding the principles and components of the ORM process will allow you to prioritize the risks that have the highest probability of the greatest loss, and then react accordingly.
What Are the Principles of Operational Risk Management?
The risk profile at every organization will be different, depending on the needs and circumstances of your company. Most programs, however, are designed around these key principles:
- Take on only those risks where the benefits are greater than the potential costs.
- Don’t take on any risk that is not necessary.
- Plan ahead to predict and mitigate risk.
- Address risks at the appropriate level.
“Level of risk” is a way of determining which risks are most critical, and therefore must be handled in a certain time frame. Ideally, a company would have the resources to assess and address all risks equally, but realistically you’ll need to make decisions based on which risks have the potential to do the most damage. The risk levels are as follows:
Strategic. Also known as In-Depth, these risks are not time-sensitive and can be assessed over a longer period. This level is best suited for newer risks that require more study to fully understand.
Deliberate. This “mid-level” category is appropriate for most risks. It is thorough and intentional but is designed for risks that don’t need the amount of research that a strategic level risk requires.
Time-critical. As the name suggests, this level is designated for risks that are immediate. This level is intended for a risk that requires a decisive strategy in a short period of time.
Becoming familiar with these principles can help you adapt a general ORM framework to one that will suit your company’s specific needs.
Mitigating Operational Risks for Businesses
Preventing risk (or barring that, minimizing loss) is the primary objective of operational risk management. To determine what risks affect you and what you can do to prevent them, follow the following key steps:
- Risk Identification.
- Risk Assessment.
- Risk Mitigation.
Risk mitigation is perhaps the most important, as this is the step where you’ll decide exactly how to address the risks that were discovered in your risk assessment. You can use many approaches to risk mitigation (alone or in combination) depending on the severity of each key risk and the potential for loss:
Risk transference. Transferring risk involves sharing or assigning your risk to another organization. You might do this by purchasing an insurance policy or storing your data with a cloud-based SaaS provider.
Risk avoidance. To avoid risk, you must refrain from entering situations where the risk may be prevalent. This conservative approach will lessen your risk exposure but may prevent you from taking opportunities that could expand your business.
Risk acceptance. Not all risks can be avoided, and sometimes the best choice is simply to move ahead knowing that some risk is inevitable. Acceptance focuses on preventing damage rather than preventing risk, and will help you develop a plan to minimize loss.
Risk control. Accepting inherent risk does not mean ignoring it; controls are any effort your organization makes to lessen the consequences of a risk that comes your way. A thoughtful series of internal controls can significantly decrease the adverse effects of your identified risks.
Once your risk mitigation decisions have been made, it’s important to observe their effectiveness over time. Operational resilience and business continuity are crucial metrics by which one can judge your risk mitigation efforts. The former measures how quickly your company can resume operations after a disruption, and the latter is the process of assuring that your controls allow your company to regain normal operations quickly. Examining your risk management process in depth will ensure that your operational risk management program grows with your company.
Schedule a Demo with ZenGRC for Your Operational Risk Management Needs
Operational risk management is easier with a clear view of the risks your company faces. It can be difficult to make appropriate business decisions while using outdated methods like spreadsheets to track your risk mitigation efforts. To truly protect your company from operational risk it’s critical that you source tools that can adjust to your needs.
ZenGRC is a unified, integrated risk management solution that tracks and monitors risk throughout your entire organization. With automation and clear, real-time reporting ZenGRC allows you full control over your company’s risk and compliance efforts.
Schedule a demo today and learn how ZenGRC can get you out of your spreadsheets and into a more effective risk framework.