Businesses across all industries face risks throughout their operations. Risks can target nearly every aspect of your business, from supply chain disruptions inhibiting manufacturing to cyberattacks rendering your data unusable.
Organizations that understand the likely risks facing them and implement controls and strategies to mitigate those risks have a greater chance of avoiding harmful situations or surviving them should they happen.
A survey of top risk managers identified the top three risks facing organizations: disruptions in IT services, data breaches, and operational resilience. So how can businesses stay ahead of these risks?
Operational risk management (ORM) is a methodology focused on policies and processes that enable organizations to prevent costly risks from occurring. ORM is often considered a subset of enterprise risk management (ERM), which focuses on the cost and benefit of preventing risks. However, operational risk management is primarily focused on risk aversion with less emphasis on the cost of doing so.
It’s time to examine operational risk management with a definition and brief overview, then explore common challenges that inhibit the effectiveness of properly managing risks. We’ll also discuss powerful operational risk management benefits that make embracing ORM well worth the time and resources.
What is Operational Risk Management?
Operational risk results from ineffective internal processes, systems, people, or events that disrupt a business’ ability to operate effectively. Losses can take many forms, for example:
- Financial loss due to halted operations
- Damaged reputation among consumers, peers, and partners following a cyber attack
- Regulatory compliance fines following failed audits
Risk management operations are any policy, process, or procedure put in place to prevent losses from being incurred. ORM is an ongoing practice that aims to continually mitigate risks through effective policies and processes. We can briefly summarize ORM as follows:
- Risk identification
- Risk assessment
- Risk measurement
- Risk mitigation and implementation of appropriate controls
- Risk monitoring, reporting, and revision
An effective operational risk management program stays ahead of risks by making impactful decisions at the right level that prevent risks from becoming a reality. While it’s common to focus on cyber attacks and how to prevent them, ORM goes beyond cybersecurity and addresses the broader risks facing an organization.
Challenges that Prevent Effective Operational Risk Management
Operational risk management is crucial to ensuring the continued success of an organization, yet it’s often overlooked or improperly implemented. Some common challenges that businesses face when implementing ORM include:
Difficulty Aligning ORM and ERM Strategies
Operational risk management (ORM) must fit into the larger enterprise risk management (ERM) strategy to guarantee that all types of risks are identified, assessed, and mitigated. Therefore, the ERM strategy should guide the ORM strategy by having related priorities and guidelines for evaluating the costs of risks and the benefits of mitigating them.
Failure to Discover Emerging Risks
Managing known operational risks is relatively straightforward, and many ORM programs excel at mitigating and controlling them. However, many ORM programs fail to detect new risks that emerge from:
- Organizational adoption of new technologies
- Introducing new products and services
- Entering a new market
- Changing regulatory guidelines
- Partnering with new vendors
Effective ORM programs continually repeat the process of risk assessment through risk monitoring to discover any risks they may face. Conversely, programs that fail to examine risks they may face regularly will struggle to implement effective policies that prevent them.
Poor Communication and Insufficient Resources
Organizational risk management requires effective communication between decision-makers and those on the front lines. For example, IT staff need to properly communicate the status of specific mitigating control, or lack thereof so that decision-makers can act accordingly.
A significant aspect of ORM is allocating resources appropriately so that new policies and processes are effective at risk mitigation. For example, suppose decision-makers decide to implement a new process to enhance the security of remote workers. In that case, they must also ensure that enough resources are allocated for IT to implement the new process, which may mean buying enough licenses of new security software.
Poor communication can often lead to insufficient resources. Both decision-makers and those on the front line must fully understand each other for ORM to succeed.
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Meaningful Benefits of Operational Risk Management
What can your organization gain with an effective ORM strategy in place? You’ll prevent situations that would otherwise prevent your organization from doing business. Significant benefits of an effective ORM program include:
Minimize the Likelihood of Risks Becoming Reality
Ultimately, operational risk management aims to prevent risks that may impact the business from coming to fruition. For example, a robust vendor risk management policy will prevent your business from partnering with a vendor with poor supply chain management.
Decision-makers must evaluate the likelihood of costly risks occurring and create effective policies and processes to truly reap the benefits of ORM. Implementing costly controls to mitigate risks that wouldn’t do much harm if they occurred isn’t beneficial to the business. It’s up to front-line workers and decision-makers to work together to identify critical risks and draft policies that will cost-effectively control them.
Refine Processes with Actionable Insights
Controls that are not adequately preventing risks will be identified and revised with an effective ORM strategy. However, a lacking ORM program may fail to identify ineffective risk.
It’s vital to regularly gather quantified data that reflects the effectiveness of a given control. For example, is the control preventing costly risks? Or is the control ineffective and merely costing the organization valuable resources?
Monitoring is considered the last step in the risk assessment process and is often overlooked. However, to truly reap the benefits of ORM, risk monitoring must be an ongoing process and automated as much as possible.
Implement and Monitor Controls for Effectiveness
ORM allows your organization to identify and implement controls that ensure the resilience of the business. Overall, the chosen controls will allow your enterprise to:
- Perpetually monitor the risk landscape and understand critical risks
- Thoroughly map risks and their controls to business processes
- Integrate resource planning to processes that effectively manage risks
- Continually reinforce required behaviors that avoid risks
- Create robust feedback loops that flag potential issues before they impact the business
Controls that depend on manual processes may fail to perpetually monitor the risks they are designed to mitigate. Instead, automated controls should be explored to make sure your organization is always aware of the actual state of its risk environment.
Improve Operational Risk Management with Centraleyes
Operational risk management is a complex process that relies on accurate data about multiple areas of an organization. Much of this information can be gathered with automated processes by embracing effective operational risk management software. The right software will provide real-time insights into the present state of risk management, including mitigating controls, regulatory compliance, and operational resilience.
Centraleyes is a powerful platform designed to aggregate as much information about your operations as possible to empower your organization to craft meaningful policies and processes that make a difference. Ready for more effective operational risk management? Book a demo with one of our ORM specialists to see what Centraleyes can do for you.
Start Getting Value With
Centraleyes for Free
See for yourself how the Centraleyes platform exceeds anything an old GRC
system does and eliminates the need for manual processes and spreadsheets
to give you immediate value and run a full risk assessment in less than 30 days