Operational Risk Management Explained: Steps, Tools & Importance

What would happen to your business if an unexpected risk caused a major disruption? Every day, businesses face various risks, from technology failures to human errors, which can affect operations. If these risks aren’t properly managed, they can lead to delays, financial losses and damage to the company’s reputation. That’s where Operational Risk Management (ORM) comes in. It's all about identifying, managing and reducing risks before they become problems.

In this blog, we will explain what ORM is and why it’s important for businesses. We will look at how ORM helps companies prevent costly disruptions and maintain smooth operations. By understanding the role of ORM, businesses can stay prepared for unexpected challenges and ensure their long-term success.

What is operational risk management?

Operational Risk Management (ORM) refers to the process of identifying, assessing and mitigating the risks that arise from a company's day-to-day operations. Unlike financial or market risks, operational risks come from internal processes, systems, people or external events that can disrupt normal business functions. This could include anything from human error and system failures to external factors like natural disasters or cyberattacks.

In simple terms, ORM helps businesses prepare for and reduce the impact of potential problems that could affect their ability to run a business smoothly. The goal is to make sure that the company continues to operate efficiently and effectively, even when unforeseen challenges arise.

Why is Operational Risk Management important?

Operational risks are unavoidable, but how a business manages these risks makes all the difference in ensuring its long-term success. Effective operational risk management is important because it:

• Helps organizations avoid costly disruptions
• Minimizes potential losses, and 
• Enhances decision-making

By understanding and addressing risks before they escalate, companies can protect their reputation, maintain regulatory compliance, and ensure they meet customer expectations. Today with the advent of technology and ever-changing business environment, having a solid operational risk management strategy can be the key to staying competitive and resilient.

Examples of Operational Risks Management

Operational risks can happen in any business irrespective of the size of the business. These risks can come from different areas, but the key to handling them is having an operational risk management plan in place. Here are some examples of how businesses manage these risks:

System failures: If a company’s computer system or software stops working, it can cause big problems. For example, a website going down or losing important data can hurt operations. Businesses handle this risk by having backup systems, regular updates and security measures to protect their IT infrastructure. An IT operational risk management plan can help prevent these issues.

Human errors: Mistakes made by employees, like entering the wrong information or overlooking important details, can cause operational problems. To reduce this risk, businesses provide regular training and use clear guidelines. They also use automated systems to minimize human errors, which is part of an effective operational risk management system.

Supply chain disruptions: Problems in the supply chain, like delivery delays or issues with suppliers, can stop operations. Companies manage this by working with multiple suppliers and having backup plans in place. This is a key part of a good business operational risk management strategy.

Regulatory compliance issues: Companies must follow rules and regulations. If they fail to do so, they could face fines or damage their reputation. To manage this risk, businesses stay updated on the laws they need to follow, conduct regular checks and make sure all employees understand compliance rules. This is an important part of operational risk management best practices.

Natural disasters and external events: Natural calamities like floods, earthquakes or even pandemics like COVID-19 can disrupt operations. Businesses handle this risk by creating disaster recovery plans, preparing for emergencies and having backup systems in place. In fact, an operational risk management framework helps companies keep running even in tough situations.

Objectives of Operational Risk Management

The main goal of ORM is to help businesses identify, assess and reduce risks that could affect their daily operations. By doing this, companies can protect themselves from unexpected problems that might disrupt their business. Here are the key objectives of ORM:

Minimize losses: One of the primary objectives of ORM is to reduce financial losses caused by operational issues. By identifying risks early and implementing solutions, businesses can avoid costly mistakes and disruptions.

Ensure business continuity: ORM helps businesses plan for unexpected events, such as system failures or natural disasters, to ensure that they can keep running smoothly. This includes having backup systems and recovery plans in place to maintain operations even in difficult situations.

Improve decision-making: By assessing operational risks, businesses can make better decisions. Understanding the risks involved in different business activities helps leaders choose the best course of action, whether it’s investing in new technology or choosing suppliers.

Protect reputation: A company’s reputation is one of its most valuable assets. Operational risk management helps ensure that businesses meet customer expectations, comply with regulations and avoid mistakes that could harm their image.

Promote compliance with regulations: Many industries have strict rules and regulations that businesses must follow. ORM helps organizations stay compliant by identifying risks related to legal issues and ensuring that they meet all necessary standards.

Enhance operational efficiency: By addressing risks and implementing solutions, ORM helps businesses improve the efficiency of their processes. When risks are managed well, operations run more smoothly and the company can focus on growth and innovation.

Types of Operational Risks Management

Operational risks can come from many different sources and the way a business manages them can vary. There are several types of operational risk management strategies that companies can use, depending on their needs and industry. Let's explore some of the most common types:

1. IT operational risk management:

Many businesses today rely heavily on technology to run their operations. IT operational risk management focuses on identifying and managing risks that arise from technology, such as 

• System failures
• Data breaches 
• Cyberattacks 

This type of risk management often involves setting up firewalls, encryption, regular software updates and disaster recovery plans to ensure the safety and continuity of IT systems.

2. Financial operational risk management:

Most businesses face financial risks, such as cash flow problems, inaccurate financial reporting or fraud. Financial operational risk management focuses on minimizing these risks by:

• Implementing strong internal controls
• Performing regular audits
• Ensuring compliance with financial regulations

It also involves setting up measures to detect and prevent fraudulent activities, which can lead to financial losses.

3. Compliance risk management:

Compliance risk arises when a business fails to meet industry regulations or legal requirements. Compliance risk management involves keeping track of relevant laws and regulations and ensuring that the company adheres to them. This includes: 

• Monitoring changes in laws
• Training employees on legal standards
• Implementing systems to check compliance regularly 

This type of operational risk management helps businesses avoid legal penalties and reputational damage.

4. Supply chain risk management:

A disruption in the supply chain can seriously affect a company’s ability to deliver products or services on time. Supply chain risk management helps businesses identify risks that could cause delays or problems, like suppliers not delivering on time, transportation issues or political problems. To manage these risks, companies often work with different suppliers, have backup plans ready and keep good communication with their partners.

5. Human capital risk management:

People are one of the most valuable parts of any business, so managing risks related to employees is very important. Human capital risk management deals with problems like employees leaving the company, lack of training or disagreements between workers. This type of risk management helps businesses by providing training, clearly defining job roles and quickly addressing any HR issues.

6. Physical and environmental risk management:

Sometimes external factors like natural disasters, fires or accidents can disrupt operations. Physical and environmental risk management involves creating strategies to reduce the impact of these events. Businesses often develop disaster recovery plans, invest in insurance and ensure that their physical infrastructure is safe and resilient to various environmental risks.

7. Reputational risk management:

A company’s reputation is an important part of its success. Reputational risk management focuses on protecting the business’s image and public trust. This includes monitoring customer feedback, handling media relations carefully and also ensuring that the company’s values align with public expectations. Further, managing reputational risk involves responding quickly to issues like negative publicity, customer complaints or scandals.

8. Operational process risk management:

This type of risk management focuses on improving the way a business works internally. Operational process risk management looks for problems like slow processes, mistakes or areas where things get stuck, which can cause delays, quality issues or unhappy customers. By fixing these problems and improving how work gets done, businesses can prevent disruptions and work more efficiently.

A Step-By-Step Guide to Operational Risk Management 

1. Establish a clear risk management policy

The first step in any ORM plan is to have a clear policy. This policy defines what risks the business faces, how to identify them and how they will be managed. The policy should be communicated to all employees to ensure everyone is aware of their role in managing risks.

2. Conduct regular risk assessments

Risk assessments are an important part of the operational risk management process. Businesses should regularly assess their operations to identify new or changing risks. This can involve analyzing potential threats in areas like IT, supply chains or compliance. Regular assessments help businesses stay prepared for any surprises.

3. Develop a risk management framework

A risk management framework is a structured approach to managing risks. This framework outlines the steps to identify, assess, prioritize and manage risks. It helps businesses understand which risks are most important and need immediate attention. The framework should also define the roles and responsibilities of employees in the ORM process.

4. Set up risk controls and mitigation strategies

After identifying risks, businesses need to put controls in place to reduce the chances of those risks happening. Risk controls can include safety measures, backup systems or improved employee training. These controls help reduce the likelihood of operational disruptions and minimize any impact if a risk does occur.

5. Create a risk response plan

Every business should have a plan for what to do when a risk turns into an issue. A risk response plan should outline how to respond to different types of operational risks, whether it’s a cyberattack, supply chain delay or compliance issue. Having a response plan in place ensures that the company can act quickly and effectively when problems arise.

6. Monitor and review risks continuously

Operational risks can change over time, so it’s important to constantly monitor them. Businesses should use operational risk management systems to track risks and identify any new ones that may appear. Regular reviews allow companies to adjust their plans and ensure they are always prepared.

7. Train employees regularly

Employees should be well-trained to identify and handle operational risks. Regular training on operational risk management best practices can help employees understand their role in preventing risks. Usually, well-trained employees are less likely to make mistakes that could lead to operational disruptions.

8. Promote a risk-aware culture

A successful operational risk management program involves creating a culture where employees are aware of risks and take them seriously. Businesses should encourage open communication about risks and ensure that employees feel comfortable reporting issues without fear of retaliation.

9. Ensure compliance with regulations

Companies must always stay compliant with laws and industry regulations to avoid legal risks. Ensuring compliance is an important part of operational risk management, as failure to comply with regulations can lead to fines, reputational damage or other operational disruptions.

10. Review and improve the risk management plan regularly

ORM is an ongoing process. Businesses should regularly review their risk management plans to ensure they are still effective and relevant. Continuous improvement of the operational risk management framework allows businesses to stay one step ahead of potential risks.

Operational Risk Management Tools and Resources

To effectively manage operational risks, businesses need the right tools and resources. These tools help companies identify, assess and mitigate risks, ensuring smooth operations even in the face of potential disruptions. In this section, we’ll explore various tools and resources that support the operational risk management process, enabling businesses to stay prepared, reduce risks and improve overall efficiency. Below is a list of essential tools that can help organizations manage risks effectively.

How Can Organizations Build a Robust ORM Framework?

To build a solid operational risk management  framework, organizations need to first understand the risks they could face. This means identifying possible problems, such as supply chain disruptions, IT failures or employee-related issues. Once these risks are identified, the company needs to create clear guidelines on how to deal with them. It’s important for everyone in the organization to know their role in managing risks and follow these guidelines when necessary.

The next step is to put systems in place to continuously monitor these risks. Companies should use tools that help track risks and evaluate how serious they might be. This allows the organization to prioritize which risks need immediate attention and which ones can be handled later. Regular checks are essential so that if something goes wrong, the company can quickly make adjustments to avoid bigger issues.

Lastly, it’s important for businesses to invest in training their employees. When the team understands the risks and knows how to handle them, they can prevent problems before they happen. By keeping employees informed and encouraging a culture of risk awareness, companies can be better prepared. Consistently reviewing and improving the risk management plans ensures that the company is always ready to face any challenges that arise.

Benefits of a Strong ORM Framework

A strong operational risk management framework is crucial for any business that wants to minimize disruptions and ensure smooth operations. It helps organizations prepare for potential risks, reduce their impact and make informed decisions. Below are some key benefits of having a well-structured ORM framework:

• Helps identify and reduce risks before they cause significant damage, ensuring smooth operations.
• Improves decision-making by providing a clearer understanding of potential risks and their impacts.
• Builds trust with customers, partners and stakeholders by showing that the company is prepared and reliable.
• Enhances compliance with laws and regulations, helping businesses avoid legal issues or penalties.
• Increases overall efficiency and competitiveness by minimizing disruptions and maintaining business continuity.

What Are the Most Common ORM Challenges?

While having an ORM framework is essential, there are several challenges organizations face when trying to implement it effectively. One of the main challenges is identifying all potential risks. Since every business is different, it can be difficult to predict every risk that could arise, especially with changing markets and technologies.

Another challenge is maintaining consistency in risk management practices. As companies grow or evolve, it can be hard to ensure that everyone across the organization is following the same risk management procedures. This can lead to gaps in risk coverage and create confusion among employees about their roles in managing risks.

A third challenge is keeping up with changing regulations. Laws and regulations often change and businesses must stay updated to ensure compliance. This requires continuous monitoring and adaptation of risk management strategies, which can be resource-intensive.

Finally, limited resources or budgets can be a challenge for smaller organizations. They may not have the tools, technology or trained staff needed to implement a comprehensive ORM framework. This can result in less effective risk management and missed opportunities for improvement.

Future Trends in Operational Risk Management

The future of operational risk management is evolving with new technologies and approaches that help businesses better handle risks. One key trend is the growing use of AI and machine learning. These technologies can analyze large amounts of data quickly, helping companies predict and identify risks earlier. AI can also improve decision-making by suggesting solutions based on past patterns and trends, making risk management more efficient.

Another trend is the increasing focus on cybersecurity. As businesses rely more on digital platforms and data, protecting against cyber threats has become a top priority. Companies are investing in advanced security systems and training to ensure they are prepared for cyberattacks, data breaches and other online risks.

The use of cloud-based risk management tools is also on the rise. These tools make it easier for organizations to access real-time data and collaborate across different departments. Cloud technology helps businesses monitor risks from anywhere, improving flexibility and response times.

Also, there’s a stronger emphasis on building a risk-aware culture within organizations. More companies are investing in training programs to ensure that employees at all levels understand the risks they face and how to manage them. This approach encourages everyone to take responsibility for risk management, leading to more proactive and effective strategies.

Strengthen Your Business with Effective Operational Risk Management

Having a solid ORM plan is important for businesses to avoid problems and keep things running smoothly. By identifying and dealing with risks early, companies can prevent costly disruptions and improve efficiency. Whether it's dealing with supply chain issues or cybersecurity threats, being prepared helps businesses stay strong and adaptable.

At Atlas Systems, we specialize in helping businesses manage risks effectively with our Operational Risk Management solutions. Our tools and expertise allow companies to stay on top of supplier risks, meet regulatory requirements and handle potential disruptions quickly. By partnering with us, businesses can build a more secure and efficient risk management system, protecting their operations and reputation.

If you want to make sure your business is ready for whatever challenges come your way, Atlas Systems can help. Talk to us today and start building a safer, more reliable future for your company.

FAQs on Operational Risk Management

1. How can small businesses implement operational risk management?

Small businesses can start by identifying risks like supply chain issues or IT failures. They can then create simple plans to manage these risks and train their employees. Using affordable tools to monitor operations will also help keep things on track.

2. What tools and software are available for operational risk management?

Operational risk management tools help businesses track and manage risks, ensuring they stay on top of potential disruptions and compliance requirements. Atlas Systems provides a comprehensive risk management solution that allows businesses to monitor supplier risks, ensure compliance and respond quickly to disruptions, helping them maintain smooth operations.

3. How do companies measure and quantify operational risk?

Companies measure risk by looking at how likely an issue is and how much damage it could cause. They use data and tools to assess past incidents and predict future risks to prioritize them.

4. How can AI and automation help in managing operational risks?

AI and automation help by quickly spotting risks and automating tasks like monitoring systems or checking compliance. This reduces human error, speeds up decision-making and helps businesses act faster when risks are detected.