Operational risk management

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Operational risk management

Operational risk management (ORM) is a continual process that involves identifying, assessing, and controlling risks arising from operational factors and making decisions that balance risk cost with mission benefits. It is a critical component of risk management and is essential for the effective functioning of any organization.

Overview

Operational risk management is designed to reduce the likelihood and impact of operational risks, which can include risks from internal processes, people, systems, or external events. These risks can lead to financial loss, reputational damage, regulatory penalties, and other adverse outcomes.

Key Components

The key components of operational risk management include:

• Risk Identification: The process of identifying potential risks that could affect the organization’s operations. This involves analyzing internal and external factors that could pose threats.
• Risk Assessment: Evaluating the identified risks to understand their potential impact and likelihood. This often involves qualitative and quantitative analysis.
• Risk Control: Implementing measures to mitigate or eliminate identified risks. This can include policies, procedures, and controls designed to reduce risk exposure.
• Risk Monitoring: Continuously monitoring the risk environment and the effectiveness of risk controls. This ensures that risks are managed proactively and that controls remain effective over time.

Methods and Tools

Several methods and tools are used in operational risk management, including:

• Risk assessment matrix
• Failure mode and effects analysis (FMEA)
• Root cause analysis
• Key risk indicators (KRIs)
• Scenario analysis

Benefits

Effective operational risk management provides several benefits, including:

• Improved decision-making
• Enhanced organizational resilience
• Reduced financial losses
• Compliance with regulatory requirements
• Protection of reputation

Challenges

Despite its benefits, operational risk management faces several challenges, such as:

• Complexity of risk environments
• Rapidly changing external factors
• Integration with other risk management processes
• Ensuring organizational buy-in and culture

Related Pages

• Risk management
• Enterprise risk management
• Financial risk management
• Compliance (regulation)
• Internal control

See Also

• Risk assessment
• Risk management plan
• Business continuity planning
• Crisis management