Operational risk is the risk of loss as a result of ineffective or failed internal processes, people, systems, or external events that can disrupt the flow of business operations. These operational losses can be directly or indirectly financial. Operational risk can also refer to both the risk in operating an organization and the processes management uses when implementing, training, and enforcing policies.

Operational Risk Management (ORM) is a more risk-averse perspective, focusing on protecting the organization as compared to the traditional Enterprise Risk Management (ERM) view. The goal is to reduce and control every risk to an acceptable level.

The process entails five Operational risk management steps to implement fundamental strategies and oversights. Identifying risks and setting procedures to mitigate, totally avoid, or accept risks are key components in the various steps of Operational Risk Management.

The first stage of any ORM strategy is to understand the nature of one’s business and the particular risks associated with it. There are three levels of Operational Risk Management, and these are as follows:

  • In-depth: This is the kind of risk management that one would be undertaking in an ideal world, as it will deliver the best results. However, operational risk management steps often are influenced by spontaneous and unforeseeable factors, thereby making this level relatively theoretical.
  • Deliberate: A crucial part of planning the Operational Risk Management steps is to elaborately study extant risk factors and devote ample time to devising mitigation strategies. The deliberate level is exercised in situations where practitioners have enough time to study a risk and apply measures to reduce its impact.
  • Time-Critical: This kind of Operational Risk Management involves more urgency as it is usually done in the midst of operational change when there is only a limited amount of time for it to be done before the potential consequences of any non-identified risks might start to be felt. During the planning of the responses to events, professionals must factor in time-critical events as the most essential ones, and accord them high importance in the steps of operational risk management.

What are the five steps of ORM?

Apart from the above levels of ORM, there are various ORM steps that are applied. However, generally, the ORM process consists of five steps. All five Operational Risk Management steps are critical and can help organizations better prepare for potential risks to their operations;

  1. Risk Identification: The first Operational Risk Management step involves identifying any potential risks associated with current or future operations. This includes factors such as major losses or accidents, legal liabilities, inadequate insurance protection, or other threats that could affect the business or organization negatively. When potential risks are identified early on, it allows for better preparedness to manage them in the event something does occur.
  2. Risk Analysis: Once risks have been identified, the next Operational Risk Management step is analyzing them to determine both their likelihood and potential impact on operations. This helps prioritize the most important risks so they can be addressed first while also allowing organizations to make informed decisions on achieving desired results in terms of risk reduction.
  3. Risk Control Measures: Once recognized and prioritized, risks must be addressed by implementing effective control measures such as policies and procedures for employees to follow as well as training and education so as to better understand why these measures are necessary. This is the third Operational Risk Management step. Additionally, technological solutions such as automated processes and systems can help reduce operational risk significantly.
  4. Risk Monitoring: The fourth Operational Risk Management step is monitoring how well control measures are working in reducing operational risk over time by assessing how successful they have been at preventing losses or accidents from occurring in specific areas of operations or departments within an organization. Regular reviews should be conducted to ensure this.
  5. Reporting and Reviewing: The final Operational Risk Management step requires organizations to document all information related to each stage—from initial identification through the implementation of controls—in a consistent manner so that stakeholders may review it periodically for accuracy and completeness before any decisions regarding changes or updates are made accordingly. Doing this ensures stakeholders have an understanding of what has been done throughout each phase so far, helping them make smart decisions about their investments moving forward.

Additionally, the five steps of the ORM process also have various benefits such as;

  • It helps organizations reduce compliance costs.
  • It promotes business resilience and operational resiliency, which improve the reliability of business operations.
  • 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.

MitKat’s flagship operational risk management dashboard – DataSurfr.Ai – aids organisations track and monitor evolving risks, subsequently assisting with the formulation of long term operational risk management steps and plans.

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