In an ideal world, every organization would operate at peak capacity, have perfectly efficient operations, and never experience system failures, cyberattacks, or fraud.
In the real world, however, it’s impossible to avoid such adverse events completely. Every organization faces problems due to weak business processes, system downtime, human error, and cybersecurity attacks. Businesses can, however, manage and mitigate the risks that lead to such events, to keep your business functional and viable. This is where operational risk management (ORM) comes in.
Operational risk is the risk of losses caused by disruptions to operations. It can arise from technology breakdowns, an evolving compliance landscape, human error, or malicious behaviors.
ORM programs are about managing these risks. The goal is to minimize the chance and effect of operational disruptions, financial losses, compliance issues, and reputational damage. An effective ORM methodology can help organizations identify and assess operational risks, including non-financial risks.
It’s imperative to address operational risks with effective controls and risk management processes to make better decisions and ensure business continuity.
What Are the Top Operational Risks for Businesses Today?
Risk #1: Cybersecurity Risks and Data Compromise, Loss, or Theft
In mid-June 2020, Gartner predicted that cybersecurity spending would reach nearly $124 billion by year-end; actual spending passed $133 billion. This increase reflected a post-pandemic cybersecurity reality where:
- Reported cyber crimes increased by 300 percent;
- Ransomware attacks cost $304.7 million by June 2021, surpassing the entire 2020 total of $304.6 billion;
- Remote-work environments increased the average cost of a data breach by $137,000;
- The average cost of a data breach increased to $4.24 million in 2021;
- Annual cybercrime damages are projected to hit $10.5 trillion by 2025.
From January-March 2020, more than 8 billion records were exposed, 273 percent more than the same period in 2019. By the end of September 2020, this number had ballooned to a staggering 36 billion.
By the end of that year, many high-profile companies and government agencies experienced data breaches, so it’s not surprising that 2020 was considered the worst year on record for data security. The trend continued in 2021, with the number of reported breaches surpassing the 2020 number by 17 percent (October).
The four most common causes of data leaks and breaches today stem from:
- Insecure devices and networks;
- Unpatched software;
- Software vulnerabilities;
- Misconfigured settings;
- Missing encryption;
- New technologies;
- Poorly managed digital transformation initiatives.
- Malicious employees or ex-employees
- Careless employees with poor cyber-hygiene
- Human error
- Careless vendors
- Remote employees using insecure systems
- Supply chain attacks
For all these reasons, cyber risk is one of the most critical operational risks today. That said, it is not the only operational risk that organizations will face.
Risk #2: IT Disruptions
IT interruptions may occur due to random blackouts, natural disasters, misconfigured new systems, and cyber attacks. These disruptions lead to downtime, harming operational continuity and service delivery. Downtime affects sales, increases customer churn, and damages the organization’s reputation.
Such disruptions can be particularly damaging in today’s world, where cloud-based services provide organizations with mission-critical technology. Should disruptions hit any of those services, your own organization can grind to a halt.
Risk #3: Fraud and Theft
When the Covid-19 pandemic struck, fraudsters targeted remote workers to steal their digital credentials. In fact, covid-related scams have cost Americans at least $586 million since the beginning of 2020. This is why fraud, theft, and other financial crimes are a serious risk for modern organizations.
Many governments instituted stimulus programs, giving fraudsters additional motives to defraud companies and employees. Nor are external thieves and scam artists the only ones who create this operational risk. Internal fraud and money laundering perpetrated by employees and third parties is also a serious concern.
Organizations must look out for these fraud trends to identify operational risks and strengthen ORM as malicious activities persist:
- Leveraging of digital channels to launch sophisticated frauds;
- Theft of user data to launch account takeover attacks;
- Exploitation of poor cyber hygiene and risky digital behaviors.
Risk #4: Resilience Risk
Operational resilience is the ability of companies to adjust their operations when faced with changing business conditions or unplanned disruptions. It is the result of:
- Protecting the resilience of IT systems;
- Strong governance and change management;
- A well thought-out strategy;
- Reliable business services;
- Robust information security;
- Business continuity planning and disaster recovery planning.
In recent years, operating environments have changed significantly and increased the threats to organizations’ operational resilience. This, in turn, has decreased their ability to successfully bounce back from adverse circumstances or events.
Risk #5: Regulatory Risk
The regulatory landscape has been evolving quickly for several years, particularly after the 9/11 attacks and the 2008 financial crisis. Since 2002, laws such as SOX (Sarbanes-Oxley Act) and the European GDPR (General Data Protection Regulation) have made it harder for firms to get away with weak internal controls and operational gaps.
There are also many laws and regulations around:
- Employment and labor;
And there are standards and frameworks implemented by:
- HIPAA (Health Information Portability and Accountability Act)
- NIST (National Institute for Standards and Technology)
- PCI DSS (Payment Card Industry Data Security Standard)
- FedRAMP (Federal Risk and Authorization Management Program)
- ISO (International Standards Organization)
These regulations add even more complexity to the operational landscape, and that’s why organizations worry about regulatory risk. They fear that regulatory changes might lead to operational mistakes, restrict competitiveness, or result in financial penalties.
Following Covid-19, regulators relaxed some rules to help organizations maintain business continuity. Inevitably, these rules will be re-tightened. To avoid penalties, firms and their risk professionals must find ways to manage this risk.
4 Key Operational Risk Management Strategies
To minimize the harm of the above operational risks, organizations will have to strengthen their ORM programs. To this end, four strategies will play an important role:
Conduct Risk Assessments
Regular risk assessments are essential to keep track of changing operational risks. By identifying and assessing risks, organizations can understand their risk profile and improve their mitigation strategies. Risk data, real-time analytics, automation, and technologies such as artificial intelligence can be beneficial for detecting many kinds of operational risks.
To further reduce operational risks, companies and senior management should regularly evaluate their risk profile and the resiliency of their processes. They should also map these processes to associated risks and controls and create a database of potential risk events.
Implement Risk Accountability
Operational risk permeates every level, business unit, and function across the enterprise. That’s why it’s essential to involve everyone in understanding and mitigating these risks, and to hold each person – not just senior management or the chief risk officer – accountable for operational risk management.
To get enterprise-wide involvement, train all employees and third-party stakeholders about the purposes and goals of ORM. Such enterprise-wide accountability helps incorporate risk-based thinking into day-to-day operations and promotes a more risk-aware culture.
Develop Key Risk Indicators
Key risk indicators are essential to understand potential issues and emerging threats that need to be addressed. Continuously measuring operational processes and controls improves visibility into the determinants of risk levels, such as spikes in transaction volumes and any stressed areas.
Organizations can use these risk indicators to identify and categorize operational risks by probability, severity, and mitigation costs.
Implement Second-line Oversight
All groups within the organization play a distinct role in keeping the operation running. The First Line operating units include managers and process owners who are primarily responsible for managing risks associated with day-to-day operations.
Second Line oversight is also crucial to improve the resiliency of the ORM program. These functions include IT security, compliance, legal, HR, finance, and related management functions. They identify emerging risks in daily operations and provide risk management, compliance, and oversight support through frameworks, policies, tools, and techniques.
Through such resources, the Second Line can help with:
- Mapping processes, risks, and controls;
- Monitoring risks and controls;
- Linking resource planning to process needs;
- Participating in change management;
- Reinforcing needed behaviors.
Include ZenRisk in Your Risk Management Plans
Regardless of your industry, your organization will face operational risk. You don’t, however, have to accept every risk passively. Instead, take an active approach to your management of operational risk. This starts with visibility.
Improve visibility into your risk landscape with Reciprocity ZenRisk. With this integrated platform, you can see the risks affecting your organization and how they are changing. Insightful reporting and dashboards highlight gaps and high-risk areas. Workflow management features offer easy tracking, automated reminders, and audit trails.
Get complete views of your internal controls and aggregate all records, reports, policies, and procedures with revision control. Access all necessary information continuously to evaluate your risk and compliance programs, minimize loss events, and safeguard your business.
To include ZenRisk in your risk management plans, schedule a demo today.