Operational Risk Management - Archer IRM
In every organization, risks are sure to be present. Risks cannot be avoided totally, but they can be mitigated, and their effect impact can be reduced.
According to the Basel Committee on Banking Supervision, operational risk can be defined as ”the risk of loss resulting from inadequate or failed internal processes, people and systems, or external events.” Operation risks can lead to financial loss, and it can alter the flow of business operations. Examples of operational risks are unlawful employee conduct and employee error, errors in business processes and controls, cybersecurity attacks leading to breach of private data and organizational assets, physical events like natural disasters, fraud (internal and external), etc.
Operational risk management is the process of organizations putting fundamental strategies and oversights into managing risks. It is the process of identifying risks and setting procedures to mitigate, totally avoid or accept risks.
Every organization has potential threats. Hence, methods should be put in place to help deal with the threats and enhance productivity.
Stages Involved in Operational Risk Management
Every organization that wants solid operational risk management will follow the steps below:
Step One: Risk Identification
This is the first step in my type of risk management process. You need to identify every possible risk specific to your business and some that are not. This process should be done thoroughly; in every sector of the organization and by members of different sectors in the organization. This makes the identification process better because the risk identified by a regular staff will differ from the risk identified by a board member.
Step Two: Risk Assessment
When all the risks have been identified, they have to be thoroughly assessed. These assessments help prioritize risks, showing which one has the highest level of occurrence, which one would cause the most damage, etc. Risk assessment is carried out from a qualitative and quantitative point of view.
Step Three: Risk Mitigation
You cannot eliminate all the risks in your organization; hence, mitigation is the next best thing. It deals with putting control in places to help reduce the chances of risks occurring in the organization. Even if risks arise, its adverse effects and business operations should be as minimal as possible. There are four options for risk mitigation, and they are Avoidance, Transfer, Control, and Acceptance.
Avoidance: This prevents your organization from getting into the risk situation completely. It is the most preferred mitigation option.
Transfer: This option shifts the risk to a third-party organization. It is either the risk is outsourced, or it is insured. Outsourcing means that your organization has transferred the responsibility of controlling the risks to another organization, but not completely. Your organization will still have a minor role to play. Insuring against threats transfers the major financial impact of the risk to the insurance company registered by the organization.
Control: These are the processes organizations put in place to ensure that the negative consequences of risks (if they occur) are significantly reduced. These processes also help organizations attain their objectives.
Acceptance: For this mitigation option, the risk is accepted. This would be the preferred option if the benefits gained trumps the cost of control. Organizations have to take the risk and try to thrive with the risk choices they have made.
Step Four: Risk Monitoring and Reporting
This final step deals with ensuring that all the risk controls and solutions are adequate. Every operational risk management plan must involve monitoring and reporting risks and how effective the control measures are. This step shows if a good job is being done to control risks and how processes can be further improved.
Benefits of Operational Risk Management
The major benefits of operational risk management include:
It helps organizations reduce compliance costs.
It makes risk management operations more effective.
It helps in decision-making processes in the organization.
It helps protect the organization from potential damage from future risks.
It helps to spot unlawful activities in the organization.
Every organization has to partake in the operational risk management process because it helps so much. These processes are not limited to only big businesses; startups can also begin the operations early.
If you don’t know how to go about this, you don’t have to worry as Archer is your solution. We have highly trained professionals skilled in risk management ready to make your build as secure as possible. These experts will answer all your risk management inquiries and guide you and your staff on the right path to follow.
What is operational risk management?
Operational risk management is the process of identifying risks and setting procedures to mitigate, totally avoid or accept risks.
What are the stages involved in operational risk management?
Risk Monitoring and Reporting