Operational risk management (ORM) is critical to every business’s overall risk strategy. It can help reduce the impact of unexpected events and improve your company’s financial performance.
ORM focuses on identifying and mitigating risks that could disrupt your operations or impact the bottom line. The goal is to prevent losses rather than relying solely on insurers to cover them after they occur.
What is the Operational Risk?
Operational risk refers to the possibility of a loss arising from the failure of internal processes or systems. It can be caused by human error, natural disasters, fraud, or other factors that disrupt your business operations. However, like credit risk, you can mitigate it by adopting a robust approach to control and governance.
Operational risks can be divided into two types: internal and external. Internal risks arise from within your organization, while factors outside your direct control cause external threats. For example, an IT failure that affects the performance of critical systems is an internal risk. On the other hand, a natural disaster such as a flood or fire would be an external risk.
Why Manage Operational Risk?
Operational risks can significantly impact your financial performance, brand reputation, and stakeholder confidence. You should therefore identify and manage these risks in their own right and as part of an integrated risk management process that considers both strategic and market risks. To do this effectively, you need to understand the sources of operational risk and how to manage them effectively across all business lines.
Tips to Proactively Manage Operational Risk
Managing risks in your organization involves identifying, assessing, and managing operational risks to protect people, assets, and your company’s reputation. The good news is that you don’t need an army of consultants or expensive software to start. Here are tips to help you with the process:
- Identify the areas where your company is most vulnerable to operational risk. This could include staff shortages, outdated equipment, and processes, lack of training, etc.
- Create standard operating procedures (SOPs) for all critical processes at work. These should include instructions on everything from how to fix a broken photocopier to how best to deal with a fire emergency at your workplace. Make sure everyone knows their roles, so they know what needs to be done if something goes wrong.
- Establish an incident response plan. This document outlines your steps if something goes wrong at work. It should include instructions on how to deal with fire, flooding, power outages, data loss, and other potential emergencies.
- Conduct training sessions on how to use your equipment and follow SOPs. This will ensure that everyone is familiar with the steps they need to take in case of an emergency, so they can act quickly without panicking.
- Create a crisis communications plan. This document will outline how you should respond to the media, customers, and other stakeholders in an emergency. It should include what to say when people call for comment, how to manage social media during a crisis, and how your employees can help spread the word about what’s happening.
- Regularly review your incident response plan with everyone who is involved. Make sure they understand their roles and responsibilities, as well as what to do in case of an emergency.
An effective operational risk management program lowers the chances of a crisis, eliminates inefficiencies, and saves money. By implementing a risk management program, you can reduce the likelihood of an operational risk event and increase your ability to detect and respond quickly if one does happen.
In addition, identifying and reducing risks before they become emergencies lower your organization’s exposure to financial loss. It’s also an excellent way to build trust with your customers and other stakeholders. Finally, by putting an operational risk management program in place, you can reduce the chances of experiencing a crisis and deal with it more effectively when one does happen.