Managers often overlook operational risks, letting financial, strategic and compliance risks gain priority. They tend to escape the fact that operational risk management is significant and integrated with other risk zones.
Let’s have a look at the following scenario to know how Alan, Jack and Sarah face a challenge in their company.
Sarah is an employee at Alan’s office and she has a new product in mind for the company.
Jack the company’s risk manager elaborates on all the four operational risks.
Operational risk can be stated as the risk of loss caused by lack of competency or insufficient human resource development, processes, systems and also external risks.
People Risk – Employee error, felonies and disagreements – any of which causes loss to the organization intentionally or unintentionally is referred to as people risk.
Process Risk – When the process flow is risked or the process execution is flawed, implying that maintenance and implementation of the process have to be calculated immaculately.
System Risk – Any disruption in data, information or technology due to breakdown, failure, piracy or threat. System risk can also occur when the technology used is not updated or fails to meet standards.
These internal operational risks can be dealt within the organization even during the initial stages of strategic and process execution to prevent glitches and loses.
External Risk – Loss caused due to a natural or non-natural cause. For example, property damage, fraud perpetration and issues on similar lines are the external factors that can intervene in business operations.
The bigger picture is that all these factors can spark off a credit danger, and lead to reputational and strategic risks.
The questions you could ask before the ideas are put into work are:
- What could possibly go wrong with it?
- What is the root cause for it to go wrong?
- What are the measures we have in place to deal with the causes?
- How efficient are the measures?
- What are the outcomes?
- What can be done to control the outcomes?
To answer the questions, we need to ideate an appropriate Operational Risk Management (ORM) process and the relevant tools.
- The first step of ORM is to identify, evaluate and prioritize the risks
- Next, formulate strategies and tools to measure the risk parameters
- Then create the 3Ps – Plans, Policies and Procedure to mitigate identified risks
- Move on to executing the 3Ps, recognize and place duties and accountabilities in the right hands
- Go ahead, assess and evaluate the effectiveness of the methods
- And finally, revamp the 3Ps to meet better efficiency
Therefore, let’s make sure every decision making from hiring a team to selling the product has to be in sync with the ORM tools and strategies.
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