What is Operational Risk Management or ORM?
Definition – Operational Risk Management or ORM is a tool that helps in determining potential operational risks and their impacts and helps in creating a step-by-step procedure or method to deal with the operational risks in any situation.
Operational risks are part and parcel of the work of every organization. Operational risks are the risks of loss due to system failure or human error, or there can be many things that can cause operational risks.
As the impacts of operational risks are severe, it becomes important to manage them.
It is a continuous process consisting of risk assessment, risk decision making, and implementation of risk control methods. With the help of this process, risks can be mitigated, accepted, or avoided completely.
Three Levels of ORM
The first and foremost step of operational risk management is to understand the nature of a business and to determine the all possible risks associated with it. For example, risks associated with the banking industry are far different from the risks associated with the hotel business.
Learn the risk associated with your business and don’t waste your time worrying about the risks associated with other industries. There are three levels of Operational Risk Management (ORM) that you can undertake and can use as a method of Operational Risk Management.
In-depth is a type of risk management which is useful to be used in an ideal world. As theoretically, it is known for providing maximum positive outcomes and minimizes the impacts of risks. However, the situations that take place in the real world are not ideal, and even the world in which our business exists is also not ideal.
The in-depth risk management can still be designed and implemented to mitigate operational risk (However, not completely). In-depth risk management is used before starting to work on a project.
The managers have plenty of time to plan and prepare for risk management.
Various precautionary measures can be established, training can be provided to the people who will work under the project, instructions can be documented, policies and procedures can be drafted, and protective equipment can be acquired for protection.
This type of risk management is more suitable for the real world. Deliberate risk management does not wait for the adverse situation to arise so that an action can be taken. It is performed at various stages of the project cycle, or it can also be used as routine safety checks and performance measures.
As the name suggests, this type of risk management is performed in critical situations. This type of operational risk management is performed amidst the operations, and when there an exercise is being executed.
Time-critical operational risk management is performed when there is limited time before the consequences of unidentified risks hit the process.
Most organizations follow this operational risk management procedure. Where they assess the situation and balance their resources accordingly, learn about the risks and communicate your intentions with your team, and at last perform and debrief.
Stages in Operational Risk Management
In the above section, you have learned about the three different procedures of Operational Risk Management, and their implementation is time-specific. In this section, you will learn about the stages involved in a standard operational risk management procedure to avoid potential risks.
1. Identification of Hazards
Identification of risk is the first and foremost step that will lead you in the direction of mitigating its effects. There are different risks associated with different types of businesses. However, there are still a few types of risks which are associated with businesses irrespective of its type.
To do this, make a team of employees from different background. In this way, you can include employees who have experience of working at a different level.
Employees with different experience will have a different insight into the business, and you can identify the risks that can take place at a different level of the business.
2. Assess the risks
In the next step, you are required to assess all the risks that you have identified. Prioritize risks based on their occurrence and based on the damage that they can cause, and the risk with the highest priority should be tackled first. Assessment of the risk should be done both quantitatively and qualitatively.
3. Look for the solution of management by measuring, mitigating, or eliminating the risks
Once you have identified and assessed the risks, you are required to look for the solution to measure the impact of the risks and solutions to mitigate or eliminate them.
It is important to control the impacts of risks so that there will be the least amount of mess whose consequences can be handled, and it causes less damage to the business.
4. Supervise and review
Your job is not done once you have determined the all potential risks and find out the methods to deal with them. Because the business environment keeps changing frequently and with the change in the business environment, the nature of risk associated with the business also keep changing.
Therefore, you should keep monitoring the system and keep looking for the potential risks and deal with them before they cause irreparable damage to the business.
In addition to this, you can also learn about the effectiveness of the approach used to deal with the damage and can work on the loopholes that you find in the procedure.
In this section, you will learn about the benefits of Operational risk management for your business and why it is important to implement.
- Operational Risk management helps you in creating more reliable and effective business operations.
- You can avoid major loss by identifying operational risks at an early stage of their occurrence.
- Continuous monitoring reviewing process of Operational Risk Management helps you to build effective risk management operations.
- The loss of capital can be minimized using effective Operational risk management tools, which was caused by poor-identified risks.
- Decision-making process for a procedure where major risks are involved become effective.
- Identifying operational risks and conducting their management results in reduction of total compliance cost.
- The future operational risks can be minimized by taking effective measures at the early stage.
- The increased trust of customers and staff as people like to associated with institutions which are less prone to risk.