Organizations today face many challenges; from cyberattacks to human error, to disruptions in daily operational activities etc. All of these can significantly impact an organization’s reputation and well-being. This is where Operational Risk Management (ORM) comes into play. In this article, we’ll take a look at the fundamentals of ORM, its importance, effective strategies for improvement, and its relevance in organizations today.
What is Operational Risk Management?
Operational Risk Management refers to the systems and processes involved in identifying, assessing, monitoring, and mitigating risks that arise from an organization’s daily operations.
It is all about proactively identifying vulnerabilities within the organization and implementing strategies to minimize their potential impact.
These risks can stem from various sources including:
- People: Operational Risk can arise due to the following employee-related factors;
- Employee Skills Gap: If a company doesn’t have staff with expertise in a critical area, they may struggle to address certain challenges effectively, posing a risk to the company.
- Insufficient Staffing: When there aren’t enough employees to handle the workload, especially during peak seasons or busy periods, tasks can get overlooked and this can easily lead to errors in deliverables.
- Misunderstood Policies: Operational risks can occur when company policies related to safety, compliance, or data handling are misinterpreted or ignored by employees.
- Insider Threats: Some employees may intentionally engage in fraudulent or harmful behavior that can affect the organization negatively, for example, data theft.
2. Processes: Inefficient workflows like overly complex approvals, can slow things down and lead to errors. Weak controls in areas like password security leave organizations open to fraud and data breaches. Ineffective workplace communication can also hinder seamless processes in organizations.
3. Technology: System outages and software malfunctions can disrupt operations and lead to less productivity. Cyberattacks can also lead to loss of sensitive data and damage to an organization’s reputation.
4. External Events: Natural disasters like floods or earthquakes can cause physical damage and disrupt organizational operations. Political instability in key markets can also disrupt business activities.
Why is Operational Risk Management Important?
There are several reasons why operational risk management is crucial for any organization. Some of them include:
- Reduced Costs: By proactively identifying and mitigating risks, organizations can avoid costly disruptions and setbacks. This can translate to significant savings in terms of legal fees and reputational damage.
- Enhanced Efficiency: A strong operational risk management framework helps streamline processes and improve internal controls. This leads to more efficient operation and better use of resources.
- Improved Decision-Making: When operational risks are actively monitored and managed, organizations can make more informed decisions based on their understanding of potential threats.
- Regulatory Compliance: Many industries have regulations that require organizations to have robust risk management practices in place. A strong ORM program ensures compliance with these regulations, helping the organization to avoid potential fines or penalties.
- Competitive Advantage: Organizations that can effectively manage operational risks are better positioned to navigate challenges and achieve their strategic goals.
How Operational Risk Management Works
Operational Risk Management follows a structured approach that can be broken down into several key steps:
1. Risk Identification: Risk Identification means finding all the possible risks that could affect an organization’s daily activities. This can be done by gathering ideas from different team members, identifying weak points in the systems, and looking at past problems to learn from them. These methods help ensure that all potential risks are highlighted and can be managed effectively.
2. Risk Assessment: Risk Assessment involves evaluating each identified risk to see how likely it is to happen and how serious the consequences could be. This helps to prioritize which risks need the most attention. By doing this, resources can be effectively allocated to address the most significant risks first.
3. Risk Treatment: Risk Treatment involves creating strategies to handle the identified risks based on their assessment. This involves:
- Avoidance: Completely removing the risk by stopping or changing a particular activity or process. This way, the risk is eliminated because the situation that could cause it no longer exists.
- Mitigation: Putting measures in place to make a risk less likely to happen or to lessen its impact if it does. This can include safety protocols, backup systems, or regular training to manage the risk better.
- Transfer: Passing the risk to someone else, like buying insurance or hiring another company to handle certain tasks. This way, if something goes wrong, the third party takes on the responsibility instead of the organization.
- Acceptance: Deciding to live with the risk because its impact is small or the cost to reduce it is too high. This approach is chosen when dealing with the risk is more practical than trying to prevent it.
4. Monitoring and Review: Operational Risk Management is an ongoing process. Monitoring and Review means continuously checking and evaluating risks to make sure the measures in place are working well. This ongoing process helps organizations stay prepared and adjust their strategies as situations change.
When is Operational Risk Management Most Effective?
Operational Risk Management (ORM) is most effective when it becomes a natural part of how a company operates and makes decisions. This means everyone in the organization understands the importance of identifying and managing risks. By being proactive- thinking ahead and preparing for possible problems, ORM can help identify potential threats before they become real issues. This helps businesses stay ahead of the curve and avoid disruptions that could harm their operations.
Regularly checking and updating ORM strategies is also key. Markets change, new technologies emerge, and regulations evolve, all of which can create new risks or change existing ones. By reviewing ORM strategies regularly, businesses can ensure their processes are effective and up-to-date. This ongoing process allows companies to adjust their plans as needed, keeping them in sync with their overall goals. When ORM is properly integrated into the system, kept proactive and updated, it not only protects a company from risks but also helps the team achieve its long-term success.
How to Improve Operational Risk Management
Organizations can take several steps to enhance their operational risk management practices such as:
- Developing a Clear Risk Management Policy: Companies that create a well-defined policy that outlines the organization’s approach to risk management and assigns clear ownership for risk mitigation, set the foundation for a strong risk program.
- Promote a Culture of Risk Awareness: Employees at all levels should be aware of operational risks and encouraged to report potential issues. Organizations should plan regular training and sponsor certifications such as Certifications by Unify’s Operational Risk Management course. This promotes a culture of risk awareness.
- Invest in Technology Solutions: Advanced technology solutions can help automate risk identification and monitoring, providing valuable insights and data for informed decision-making.
- Conduct Regular Risk Assessments: Regularly reassessing risks helps businesses stay ready for new challenges as the business environment changes. By staying updated on potential threats, organizations can adjust their plans to keep running smoothly and adapt to new opportunities.
Operational Risk Management is all too important for organizations seeking to thrive amidst changes and uncertainties. By implementing robust ORM frameworks, organizations can save costs, enhance decision-making processes, ensure regulatory compliance, and improve overall operational efficiency.
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