Operational Risk Management

Definition and Importance

• Operational risk management (ORM) refers to the practice of identifying, assessing, and mitigating risks that can affect an organization's operations, reputation, and financial performance.
• ORM is essential to ensure business continuity, protect assets, and maintain stakeholder trust.

Types of Operational Risks

• Internal Risks:
  • People risks (e.g., human error, fraud, misconduct)
  • Process risks (e.g., inadequate procedures, technology failures)
  • Systems risks (e.g., IT failures, data breaches)
• External Risks:
  • Event risks (e.g., natural disasters, pandemics)
  • External fraud risks (e.g., cyberattacks, vendor fraud)

Operational Risk Management Framework

• Risk Identification: Identify potential operational risks through techniques like brainstorming, SWOT analysis, and root cause analysis.
• Risk Assessment: Assess the likelihood and impact of identified risks to prioritize mitigation efforts.
• Risk Mitigation: Implement controls and strategies to mitigate or reduce operational risks.
• Risk Monitoring and Review: Continuously monitor and review operational risks to ensure effective mitigation and update risk assessments.

Operational Risk Management Strategies

• Risk Avoidance: Eliminate or withdraw from risky activities or processes.
• Risk Transfer: Shift risks to other parties through outsourcing, insurance, or hedging.
• Risk Mitigation: Implement controls and procedures to reduce risk likelihood or impact.
• Risk Acceptance: Accept and monitor risks that are deemed acceptable or unavoidable.

Best Practices for Operational Risk Management

• Establish a risk management culture and policy.
• Identify and prioritize critical business processes and assets.
• Conduct regular risk assessments and reviews.
• Implement effective incident response and business continuity plans.
• Continuously monitor and update risk management strategies.

Operational Risk Management (ORM)

• ORM is the practice of identifying, assessing, and mitigating risks that can affect an organization's operations, reputation, and financial performance.
• It is essential to ensure business continuity, protect assets, and maintain stakeholder trust.

Types of Operational Risks

Internal Risks

• People risks: human error, fraud, misconduct
• Process risks: inadequate procedures, technology failures
• Systems risks: IT failures, data breaches

External Risks

• Event risks: natural disasters, pandemics
• External fraud risks: cyberattacks, vendor fraud

Operational Risk Management Framework

Risk Identification

• Techniques used: brainstorming, SWOT analysis, root cause analysis

Risk Assessment

• Assess likelihood and impact of identified risks
• Prioritize mitigation efforts

Risk Mitigation

• Implement controls and strategies to mitigate or reduce operational risks

Risk Monitoring and Review

• Continuously monitor and review operational risks
• Ensure effective mitigation and update risk assessments

Operational Risk Management Strategies

Risk Avoidance

• Eliminate or withdraw from risky activities or processes

Risk Transfer

• Shift risks to other parties through outsourcing, insurance, or hedging

Risk Mitigation

• Implement controls and procedures to reduce risk likelihood or impact

Risk Acceptance

• Accept and monitor risks that are deemed acceptable or unavoidable

Best Practices for Operational Risk Management

• Establish a risk management culture and policy
• Identify and prioritize critical business processes and assets
• Conduct regular risk assessments and reviews
• Implement effective incident response and business continuity plans
• Continuously monitor and update risk management strategies

Business Continuity in Operational Risk Management

Definition and Purpose

• Business Continuity is a process that ensures an organization's ability to continue operating and delivering its products and services at an acceptable level, following a disruption or disaster.

Key Components

• Business Impact Analysis (BIA) identifies critical business processes, assesses the impact of disruptions, and determines the minimum resources required to recover.
• Risk Assessment identifies potential risks and threats to business continuity, prioritizing them based on likelihood and impact.
• Business Continuity Plan (BCP) is a documented plan outlining procedures to respond to disruptions, ensure continuity of critical business processes, and restore operations.
• Crisis Management is a framework for managing and responding to crises, ensuring effective communication and decision-making.

Business Continuity Planning Process

• The planning process involves six stages: Risk Identification, Business Impact Analysis, Strategy Development, Plan Development, Plan Implementation, and Plan Testing and Maintenance.

Benefits of Business Continuity in Operational Risk Management

• Business Continuity reduces downtime, minimizing the impact of disruptions on business operations and revenue loss.
• It enhances organizational resilience, ensuring the ability to respond to and recover from disruptions.
• Business Continuity improves reputation, demonstrating a commitment to customers and stakeholders, and enhancing credibility.
• It helps organizations comply with regulatory requirements and industry standards.