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Operational risk is the risk of loss resulting from ineffective or failed internal processes, people, systems, or external events that can disrupt the flow of business operations. The losses can be directly or indirectly financial. For example, a poorly trained employee may lose a sales opportunity, or indirectly a company’s reputation can suffer from poor customer service. Operational risk can refer to both the risk in operating an organization and the processes management uses when implementing, training, and enforcing policies. Operational risk can be viewed as part of a chain reaction: overlooked issues and control failures — whether small or large — lead to greater risk materialization, which may result in an organizational failure that can harm a company’s bottom line and reputation. While operational risk management is considered a subset of enterprise risk management, it excludes strategic, reputational, and financial risk.
How Does Operational Risk Management Work?
When dealing with operational risk, the organization has to consider every aspect of all its objectives. Since operational risk is so pervasive, the goal is to reduce and control all risks to an acceptable level. Operational Risk Management attempts to reduce risks through risk identification, risk assessment, measurement and mitigation, and monitoring and reporting while determining who manages operational risk.
These stages are guided by four principles:
- Accept risk when benefits outweigh the cost.
- Accept no unnecessary risk.
- Anticipate and manage risk by planning.
- Make risk decisions at the right level.
What Are the Benefits of a Strong Operational Risk Management Program?
- Better C-suite visibility.
- Better informed business risk-taking.
- Improved product performance and better brand recognition.
- Stronger relationships with customers and stakeholders.
- Greater investor confidence.
- Better performance reporting.
- More sustainable financial forecasting.
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