In the dynamic and complex world of business, organizations face a myriad of challenges that can disrupt their operations. One of these challenges is risk, which can arise from various sources and affect different aspects of an organization. It’s in this context that operational risk management emerges as a crucial aspect of any successful business strategy.
Before we delve into the heart of the matter, let’s set the stage by understanding what the operational risk management process entails. In essence, it’s a continuous process involving identification, assessment, decision making, and implementation of actions to accept, reduce, or mitigate risks that may adversely impact an organization’s operations.
Definition Of Operational Risk Management
Operational Risk Management, often abbreviated as ORM, refers to a systematic approach to business practices designed to identify, assess, monitor, and control operational risks. These risks encompass anything that could disrupt day-to-day business operations, including equipment failure, fraud, mismanagement, and natural disasters, among other things.
According to a survey by risk management strategy at Protiviti, 89% of organizations see the primary objective of operational risk management as minimizing financial losses.
Importance Of Operational Risk Management
The importance of operational risk management cannot be overstated. It not only protects an organization against potential losses but also ensures its survival in the event of significant disruptions. More importantly, ORM allows businesses to optimize their operations, thereby enhancing efficiency and increasing profitability.
The average cost of a data breach in 2021 was $3.86 million, with an additional $315 million spent on legal and regulatory fees, as per IBM’s Cost of a Data Breach Report.
Understanding The Primary Objective Of Operational Risk Management
Now that we’ve understood what ORM is, and why it matters, let’s delve into its primary objectives. While different organizations may have varying specific goals based on their unique circumstances, the overarching goal of ORM is to safeguard the organization against operational risks while optimizing business performance.
The primary objective of ORM is to minimize losses. This involves identifying potential risks before they materialize and implementing measures to either prevent them or mitigate their impact should they occur. By doing so, businesses can protect their assets, manage operational risk, ensure continuity of operations, and ultimately maintain their bottom line.
A study by KPMG found that 30% of organizations consider the primary objective of operational risk management to be the identification and of key risk indicators and mitigation of emerging risks.
Enhancing Operational Efficiency
Another key objective of ORM is enhancing operational efficiency. By identifying and mitigating potential risks, organizations can prevent disruptions that can hamper productivity and cause inefficiencies. Additionally, ORM helps businesses streamline their operations, thereby making them more efficient and cost-effective.
Maintaining Business Continuity
The third major objective of ORM is maintaining business continuity. Risks, if not properly managed, can lead to severe disruptions that can halt business operations. By implementing effective ORM strategies, businesses can ensure that they continue operating seamlessly, even in the face of adverse external events.
The Global Risk Management Survey by Deloitte reported that 77% of organizations consider the primary objective of their operational risk management function to be the protection of shareholder value.
Components Of Operational Risk Management
Operational risk management is composed of several key components, each playing a vital role in the overall process. These include risk identification, risk assessment, risk decision making, risk assessments, and risk control.
This is the first step in the ORM process, where potential risks are identified. This involves examining all areas of the organization to uncover any potential threats technology risks that could disrupt operations.
Once risks have been identified, they need to be assessed. This involves determining the likelihood of each risk occurring and the potential impact it would have on the organization.
Risk Decision Making
Based on the risk assessment, decisions need to be made on how to respond to each risk. This could involve accepting the risk, reducing it, or the risk exposure by transferring it to another party.
The final step in the ORM process is risk control. This involves implementing the decisions made in the previous step and monitoring and reporting their effectiveness.
In a study by Accenture, 43% of financial institutions stated that enhancing regulatory compliance is a primary objective of their operational risk management efforts.
Techniques For Effective Operational Risk Management
To manage operational risks effectively, organizations need to employ a range of techniques. These may vary depending on the nature and size of examples of operational risk within the organization, but some common ones include developing a risk management plan and regularly monitoring and updating it.
Developing A Risk Management Plan
A well-thought-out risk management plan is a cornerstone of effective risk management capabilities in ORM. It should outline the strategies and procedures to be followed in identifying, assessing, and controlling risks. The plan should also clearly define roles and responsibilities, ensuring all stakeholders understand what is expected of them.
Monitoring And Updating The Plan
A risk management plan is not a one-off document – it needs to be regularly monitored and updated. This allows for adjustments to be made as the business environment changes, and new risks emerge.
A survey by Deloitte found that 70% of executives believe that the primary objective of operational risk management is to keep internal controls and protect the organization’s reputation and brand.
Role Of Technology In Operational Risk Management
In today’s digital age, technology plays an increasingly important role in ORM. From risk management software to sophisticated data analysis tools, technology can significantly enhance an organization and senior management’s capability to manage operational risks.
Use Of Risk Management Software
Risk management software can automate much of the ORM risk management process, making it more efficient and accurate. It can help in risk identification, assessment, decision making, and control, thereby reducing the possibility of human error.
Importance Of Data Analysis
Data analysis is crucial in ORM. By analyzing large volumes of data, organizations can uncover patterns and trends that might indicate potential risks. Moreover, data analysis can provide valuable insights into the effectiveness of risk control measures, enabling continuous improvement.
The estimated economic cost of operational risk events in the financial services industry from 2000 to 2019 was approximately $2.36 trillion, according to the Basel Committee on Banking Supervision.
As we look to the future, it’s clear that operational risk management will continue to play a pivotal role in business success. With the increasing complexity of business operations and the ever-evolving enterprise risk management landscape, effective ORM will be more critical than ever. Moreover, with advancements in technology, we can expect new tools and techniques to emerge, further enhancing our ability to manage operational risks.
So, in conclusion, the primary objective of an operational risk management program is to protect an organization from potential losses due to operational risks, while optimizing business performance. It’s a dynamic and ongoing process that requires continuous monitoring and updating. And with the help of technology, organizations are now better equipped than ever to manage these risks effectively.