Operational Risk

Operational risk is the risk faced by an organization due to its operations. It is the risk of losses arising from inadequate or ineffective controls over the processes of the organization.

Key characteristics of operational risk:

• Inherent: It arises from the nature of the organization’s operations itself.
• Uncertain: It can be difficult to predict the exact impact of operational risk.
• Ongoing: Operational risk is a constant threat that organizations need to manage continuously.
• Involves people: Operational risk is often caused by human error or failure to follow procedures.
• Can have a significant impact: Operational risk can have a major impact on an organization’s operations and its ability to achieve its goals.

Types of operational risk:

• Process risk: Risks associated with the organization’s processes, such as errors in accounting or manufacturing.
• Technology risk: Risks associated with the organization’s technology systems, such as software failures or cyberattacks.
• Human error risk: Risks associated with human error, such as mistakes made by employees or contractors.
• External risk: Risks associated with events outside of the organization’s control, such as natural disasters or political instability.

Common operational risk management techniques:

• Risk assessment: Identifying and assessing the potential operational risks facing the organization.
• Risk mitigation: Putting controls in place to reduce the likelihood and impact of operational risks.
• Risk monitoring: Tracking and reviewing the effectiveness of risk mitigation controls.
• Business continuity planning: Developing plans to ensure that the organization can continue to operate in the event of disruptions.

Examples of operational risk:

• A manufacturing plant has a high risk of quality control issues due to the complexity of the production process.
• A bank has a high risk of fraud due to the nature of its operations and the potential for human error.
• A hospital has a high risk of infection due to the presence of sick patients and the potential for contaminated equipment.

Operational risk is an important part of risk management for any organization. By understanding the potential risks and taking steps to mitigate them, organizations can improve their ability to achieve their goals and reduce the impact of operational failures.