The Vital Role of Operational Risk Management
Operational risk management is a critical component of any business strategy. It is the process of identifying, assessing and controlling the potential risks that could impact the day-to-day operations of an organization. Effective operational risk management helps businesses to minimise potential losses, protect their reputation, and ensure the continuation of their operations.
The 4 Options of Operational Risk Management
In the Operational Risk Management process, there are four options for managing risk: avoiding, reducing, transferring, and accepting. Each option has its own advantages and disadvantages, and the best approach depends on the specific risks and goals of the organization.
1.Avoiding
Avoiding risk involves eliminating the risk altogether. For example, if a business determines that outsourcing a particular process is too risky, it may choose to keep that process in-house. This approach is often the most effective, but it may not always be practical or possible.
2. Reducing
Reducing risk involves minimising the potential impact of the risk. This can be done by implementing controls, such as implementing security measures or increasing insurance coverage. The goal of reducing risk is to minimise the potential impact of a risk event, should it occur.
3. Transferring
Transferring risk involves transferring the responsibility for managing the risk to another party. For example, transferring the risk of supply chain to an insurance company through liability insurance. The advantage of transferring risk is that it allows the organisation to focus on its core operations, while a third party manages the risk.
4. Accepting
Accepting risk involves acknowledging that a risk event may occur, but deciding to take no action to mitigate it. This approach may be appropriate for low-impact risks, or for risks that are unlikely to occur. It is important to weigh the potential impact of a risk event against the cost of mitigating it, and make an informed decision on the best approach.
The Benefits of Operational Risk Management
According to Harvard business school (source), improved decision-making is an essential business skill that drives organizational performance, with a 95% correlation between decision-making effectiveness and financial results. This highlights the importance of effective decision-making for all levels of management to improve organizational performance and generate better financial results.
Increased transparency and accountability in a business can bring several benefits, one of which is greater integrity and eradication of unfairness and inequality. This can be achieved by providing all stakeholders with the same information, which leads to more informed and equitable decision-making. This can be seen as a way of creating a level playing field and promoting fairness in the workplace, leading to improved employee satisfaction and motivation.
A business can benefit from enhanced reputation and brand image in several ways. The reputation of a business establishment plays a crucial role in increasing the value of the company, as clients and consumers will often choose one brand over another due to its positive image
According to Forbes Improved risk management processes also need to tap into external data sources to identify digital signals that provide early indicators of risk.
Increased efficiency and effectiveness, resulting in an average increase of 5-15% in operational efficiency, and a corresponding increase in revenue.
Employee safety is an important factor and by identifying and mitigating potential risks in the workplace, companies can create a safer environment for their employees. This not only has the potential to reduce accidents and injuries, but it can also help to improve employee morale and increase productivity.
In summary, Operational risk management is an essential component of any business strategy. It helps organisations to minimise potential losses, protect their reputation, and ensure the continuation of their operations. By understanding the four options for managing risk and the benefits of effective risk management, businesses can develop a comprehensive strategy that meets their unique needs and goals