What Is Operational Risk Management? (Definition and Tips)
Operational risk management is a process that managers and business analysts use to reduce the financial risks that daily business operations may cause. Understanding the risks that may occur during daily operations can help companies minimize and manage them. If you're a business professional, it's important to know about operational risk management. In this article, we explain what operation risk management is, explain why it's important and share steps and tips on how to implement operational risk management at the company for which you work.
What is operational risk management?
Operational risk management is a process involving risk analysis, strategy and risk control to identify and reduce risks that may occur in daily business operations. The objective of this form of management is to control and minimize operational risks which are losses due to failures in processes, systems or by employees in the business. Often operational risks cost the company money, but they can amount to other losses such as time, project deadlines or clients. Using operational risk management as a tool helps increase revenue, productivity and the overall success of an organization.
Read more: What Is Risk Analysis in Business?
Why is operational risk management important?
Operational risk management is extremely important to the success of a business. Having a tool or process in place to assess risks and neutralize them saves money, time and hardships for the business. Here are the benefits of operational risk management:
Improves decision-making processes
By being able to effectively identify and assess risks, managers can create better strategies to complete projects. With an awareness of the potential risks regarding a process, you can make well-informed decisions on how to proceed and avoid these risks. For example, the operational risk may be the possibility of a cyber-attack. With operational risk management, you can identify that this may be the cause an issue and plan to reinforce the network firewalls to protect company data.
Helps identify unsafe conditions or practices
Operational risk management also helps identify conditions that may be unsafe to work in or employee practices that could cause an error. It's important to recognize these types of risks before beginning operations to prevent damage or injuries to employees or company property. This also helps the business comply with laws and regulations, which contributes to better products of consistent quality.
Creates better products
When businesses follow rules and minimize any risks that the production of a product can involve, they can create more consistent products. This consistency makes the company reliable and can help increase customer loyalty. Once a process can produce high-quality items regularly, a business may choose to adjust its steps in order to improve the product. With operational risk management, this is possible and is usually highly effective because reducing risks saves money that the business can reinvest in their products.
Contributes to transparency between executives and employees
A process such as operational risk management enables executives and employees to communicate their needs with each other more clearly. Adhering to regulations and minimizing operational risks that have financial costs is essential to executives operating their business. These operational risk management methods also help keep employees safe. Working together to identify and reduce risks is mutually beneficial.
The mutual benefit can encourage transparency because clear communication limits risks. Executives have more motivation to be honest about processes and their expectations because the safety of their employees and the success of their business depend on being transparent about potential risks.
Provides effective financial forecasting
Since operational risks are often financial losses, the ability to identify these risks helps forecast finances accurately. Knowing that these losses are being avoided, lets financial experts recalculate their projections. Better financial forecasting is beneficial because it helps determine a budget, investments and enables a business to make other financial decisions. This financial forecasting can also show employees how much they save the business by preventing certain risks. Knowing that their efforts have positive results can motivate them to improve risk analysis and prevention.
How to implement operational risk management
Implementing an effective operational risk management process increase profits for a business and helps create products of higher quality. Learning how to develop this process and train employees to use it may bring more success to employees and the business. Here are five steps to implement operational risk management:
1. Identify risks
Operational risk management has stages, and the first is to identify what might cause an error during a project or process. In order to improve your ability to recognize potential risks, you can develop a control framework that helps identify and minimize risks by categorizing the business's practices and procedures. If your operations have stored data, you can automate this control framework to analyze data and find potential risks.
Related: How To Conduct a Thorough Risk Audit
2. Assess how risks can affect business operations
After identifying potential risks, it's important to analyze and predict how the risks may affect the business operations. The operational risk management process involves assessing the likelihood of a risk occurring and helps measure the degree of impact. For example, if the control framework signifies that there could be a security breach, then you can assess this risk and determine how a breach can affect your data, employees, stakeholders or business.
3. Develop a scale to measure risks
Measuring risks is an essential step to minimizing them. When assessing risks, you may use a scale to determine how big the risk is. This scale helps prioritize risks and address the most serious ones. It's smart to use a scale like this so that you can reduce the damage a risk may cause to your projects.
Consider the cost of preventing the risk when measuring it on your scale. If a risks cost more to prevent than another, managers may prefer to address other risks instead. Determining the cost of prevention also helps decide if it's worth addressing.
4. Assign team members to monitor risks
Monitoring the risks is another stage of operational risk management. It's a good idea to create a team of employees to monitor the risks you identify. This team can continue to measure risks and monitor the likelihood of the risks actually occurring. By having one team focus on this, other employees can focus on production tasks. The monitoring team can also develop plans to solve issues the risks may cause and plan for risk prevention.
5. Strategize on how to avoid potential risks
In order for operational risk management to be the most effective, develop a strategy to avoid or minimize the risks you find. A risk management strategy may involve methods to isolate a risk from a project or process and eliminate it. The monitoring team can be responsible for developing this strategy and implementing it by taking action to reduce the threat of risk.
Tips for effective operational risk management
In order to make your operational risk management process more effective try these tactics:
Keep a record
Try to document every stage of the operational risk management process, including identification, assessments and monitoring of a certain risk. This record can help advise future risk mitigations and analyses. A record of risks associated with a project can also help inform project management strategies. For example, project managers can use this record to determine if there are inefficiencies in the planning process.
Use a repeatable process
When developing your operational risk management process, consider creating steps that are easy to repeat. This can help you learn how to perform the process easier and also allows for simpler training. This means that more professionals can perform the operational risk management process. Having a repeatable process can also help reduce the risk of error in your analysis, as you can perform it more than once to see if you find the same results.
Assign roles within the risk management team to allow tasks to be more manageable and to promote accountability. If employees focus on different operational risks, they may be more likely to notice an issue. Assigning roles within an operational risk management team can also help ensure that you can monitor each type of risk effectively.
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