Introduction

Operational Risk Management (ORM) is a critical component of any organization’s overall risk management strategy. It involves identifying, assessing, and mitigating risks that can impact an organization’s operations, reputation, and bottom line. In this blog post, we’ll delve into the world of ORM through expert insights and real-world examples. We’ll explore the importance of ORM, its key components, and strategies for effective implementation. Whether you’re a seasoned risk manager or just starting out, this post will provide valuable insights to help you master ORM.

The Importance of Operational Risk Management

According to a survey by the Risk Management Society (RIMS), 71% of organizations consider operational risk to be a major concern. (1) This is not surprising, given the potential consequences of operational risk events, which can range from financial losses to reputational damage. Effective ORM can help organizations avoid these consequences and achieve their strategic objectives. By identifying and mitigating operational risks, organizations can:

  • Improve efficiency and productivity
  • Enhance reputation and stakeholder trust
  • Reduce financial losses and improve profitability
  • Increase compliance with regulatory requirements

Understanding Operational Risk

So, what exactly is operational risk? The Basel Committee on Banking Supervision defines operational risk as “the risk of loss resulting from inadequate or failed internal processes, systems and people, or from external events.” (2) This broad definition encompasses a wide range of risks, including:

  • Human error and behavioral risks
  • Technology and system failures
  • External events such as natural disasters and pandemics
  • Regulatory and compliance risks

To effectively manage operational risk, organizations must first understand the risks they face. This requires a thorough risk assessment, which involves identifying potential risks, assessing their likelihood and impact, and prioritizing them for mitigation.

Implementing Operational Risk Management

Implementing effective ORM requires a structured approach that includes the following key components:

1. Governance and Oversight

Effective ORM starts with strong governance and oversight. This includes establishing a clear risk management framework, assigning risk management responsibilities, and providing adequate resources and support.

2. Risk Assessment and Identification

As mentioned earlier, risk assessment is critical to effective ORM. This involves identifying potential risks, assessing their likelihood and impact, and prioritizing them for mitigation.

3. Risk Mitigation and Control

Once risks have been identified and prioritized, organizations must implement effective risk mitigation and control strategies. This may include implementing new processes or systems, providing training and awareness programs, or establishing contingency plans.

4. Monitoring and Review

Finally, organizations must continuously monitor and review their ORM efforts to ensure they are effective. This includes tracking key risk indicators, conducting regular risk assessments, and reporting to stakeholders.

Best Practices in Operational Risk Management

So, what sets effective ORM programs apart from the rest? Here are some best practices to keep in mind:

  • Integrate ORM into overall risk management strategy: ORM should be an integral part of an organization’s overall risk management strategy.
  • Establish a risk-aware culture: Encourage a risk-aware culture within the organization, where employees understand the importance of risk management and are empowered to report risks.
  • Use data and analytics: Leverage data and analytics to inform risk assessments and mitigation strategies.
  • Continuously monitor and review: Regularly review and update ORM efforts to ensure they remain effective.

Conclusion

Operational Risk Management is a critical component of any organization’s overall risk management strategy. By understanding the importance of ORM, identifying and assessing operational risks, and implementing effective ORM strategies, organizations can improve efficiency, enhance reputation, reduce financial losses, and increase compliance. We hope this post has provided valuable insights to help you master ORM. What are your thoughts on Operational Risk Management? Share your experiences and insights in the comments below!

References:

(1) Risk Management Society (RIMS). (2020). 2020 RIMS Risk Management Survey.

(2) Basel Committee on Banking Supervision. (2003). Sound Practices for the Management and Supervision of Operational Risk.