Every business faces situations or fundamental changes in its condition that might pose varying levels of risk, ranging from minor inconveniences to a crisis that could put the company’s entire operation at risk. Operational risk management (ORM) is a set of processes that encompass risk assessment, decision making, and implementation of risk control, to reduce such threats to acceptable levels.
Examples of operational risk include:
- Employee conduct and employee error
- Breach of private data due to cybersecurity attacks
- Technology risks tied to robotics, automation, and artificial intelligence
- Physical safety threats to employees or defective manufacturing processes
- Natural disasters
- Internal and external fraud
The Basel Committee on Banking Supervision has described operational risk as “the risk of loss resulting from inadequate or failed internal processes, people, systems, or 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.”
Operational risk management applies to all sectors and industries. That said, operational risks for banks and financial services will look different from operational risks for a manufacturing facility. Ultimately, a robust operational risk management process is necessary for any organization to avoid potentially disastrous issues and to assure business continuity.
Operational risk management (ORM) is critical to keep operations running smoothly so the business can advance on its strategic plans. Although strategic and operational risks are different types of risk, they do affect each other. Risk assessments help you distinguish between them, so that you can implement the appropriate mitigation steps to manage your short-term ORM and long-term strategic goals.
What Are the Benefits of ORM?
Operational risk management helps organizations to assure business continuity and lower compliance costs. Adequate ORM drives business resilience, improves efficiency, and lowers compliance costs.
The control activities associated with ORM streamline decision-making based on quantitative metrics. Internal controls are developed based on risk assessments, and business processes are designed to prevent and detect illicit activities in the enterprise.
Another benefit of operational risk management: helping a company to reduce potential losses from poorly identified and emerging risks. Establishing an effective operational risk management program prepares a company to achieve its strategic objectives and assures business continuity despite unanticipated disruptions to operations.
A solid operational risk management program also indicates to customers and stakeholders that the company is prepared to deal with disasters and losses. This confidence builds trust and a strong competitive advantage, resulting in:
- Improved product performance and better brand recognition
- Robust relationships with customers and stakeholders
- Greater investor confidence
- Better performance reporting
- More sustainable financial forecasting
What Is the Objective of ORM?
The use of analytical tools for operational risk management has several objectives, including the following:
Different types of risks require different risk mitigation methods. Cybersecurity, fraud, and natural disasters require various internal and risk internal control activities. ORM and risk management frameworks help organizations categorize risks and approach them appropriately.
Risk assessments help you aggregate risks and then prioritize them, so that each risk has the right level of attention based on the likelihood of occurrence and effect to the business. Proper prioritization allows senior management to justify investments to prevent high-risk threats or accept other risks if the effect is minimal.
Adds Greater Value to Risk Management
Implementing well-applied operational risk management tools generates added value to your organization. By avoiding a “check the box” approach, the operational risk management function can add value to the overall risk strategy and allow senior management to make better-informed risk decisions based on their risk appetite.
Stages of Operational Risk Management
The stages of operational risk management are:
- Risk identification
- Risk assessment
- Measurement and mitigation
- Monitoring and reporting
The first stage of an operational risk management strategy is understanding the nature of the business and the potential risks associated with that company. Brainstorming and identifying potential risks must involve employees from all levels of the business.
After the organization identifies the risks, it has to assess their potential threat. Companies perform risk assessments from quantitative and qualitative perspectives, considering the potential likelihood and severity of occurrence. Tools such as a risk matrix help the team to compare the risks and then prioritize time-critical issues versus those less severe.
Measurement and Mitigation
Mitigating or eliminating these risks is the next stage. First, organizations need to put controls in place to limit their exposure to the risks and the potential damage caused by these risks. Metrics and key risk indicators (KRIs) are valuable early warnings to pinpoint problems quickly and avoid operational losses.
Monitoring and Reporting
Any ORM process must include ongoing monitoring and reporting of internal and risk controls. It’s imperative to verify the effectiveness to ensure they are operating as expected without putting unnecessary stress on the organization. Risk controls should add value while being practical, not just creating extra work.
Establishing effective risk management capabilities is key to enabling better business decision-making. Senior management can leverage these tools to gain a competitive advantage by improving business operations and business continuity.
Manage Operational Risk with ZenRisk
ZenRisk allows you to have end-to-end control over your company’s risk endeavors, and is intuitive and simple to use. It streamlines evidence management, workflows, and reporting for risk management.
Security policies, incident response procedures, and internal controls must be documented and updated regularly to assure they meet evolving risk and compliance requirements. With ZenRisk’s document repository, policies and procedures are revision-controlled and easy to find.
Workflow management features offer easy tracking, automated reminders, and audit trails. Insightful reporting and dashboards provide visibility to gaps and high-risk areas. By better understanding your risk landscape, you can take action to protect your business from cyberattacks, avoid costly data breaches, and monitor the security posture of your vendors.
Schedule a demo today and learn how ZenRisk can get you out of your spreadsheets for more effective operational risk management.