Some are embedded in the day-to-day running of a business. Manufacturing reporting tracks OSHA recordables, environmental compliance metrics, and quality certification audit results. Professional services reporting emphasizes quality metrics for peer review and regulatory inspection purposes.
How is operational risk measured by banks and financial institutions?
Financial services emphasize technology resilience, business continuity management, and third-party risk management. Financial services operational risk spans Basel event categories requiring 10 years of high-quality loss data mapped to supervisory categories. First-line operational management owns risks directly, second-line risk management provides oversight and policy guidance, while third-line internal audit delivers independent assurance. Continuous monitoring transforms static frameworks into real-time risk intelligence, preventing documentation from becoming obsolete as your business environment evolves. Design proportionate controls aligned with risk severity—over-controlling low-impact risks wastes resources that should address critical exposures.
- It focuses on analysing and measuring risks, such as the frequency and potential impact of loss events, to provide actionable financial insights.
- Even small organisations benefit from a structured approach to managing risks, ensuring resilience and compliance.
- In fact, 76% of companies are either running or planning enterprise risk management (ERM) programs.
- To identify risks, organizations may use a variety of methods such as brainstorming sessions, interviews with stakeholders, and risk assessments.
- At Protecht, we provide a seamless, integrated approach to risk management and operational resilience.
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How AI is revolutionizing the way risk professionals work
- In contrast, financial risk deals with market fluctuations, and strategic risk relates to long-term business goals or competitive positioning.
- Outsourcing specific tasks can help control costs.
- By contrast, operational risk management seeks to reduce unintentional risk.
- Organizations with CRO-led programs reported 24.9% better integration with internal controls, demonstrating the value of dedicated leadership at the managing partner or C-suite level.
- Unlike traditional ORM and business continuity planning, operational resilience takes a broader approach by integrating preparedness, adaptability, and long-term sustainability into risk management.
In his book A Short Guide to Operational Risk, Protecht’s Chief Research & Content Officer David Tattam defines ORM as “the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events”. Operational resilience is about ensuring that critical functions continue with minimal disruption, protecting both internal operations and external stakeholders, such as customers and partners. ORM not only protects the business but also builds resilience, trust, and long-term value. Operational risk focuses on failures in day-to-day business functions, like process breakdowns, cyber incidents, or human error.
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Small organisations can start with affordable or open-source tools, while larger enterprises may require advanced systems and dedicated personnel. Costs vary widely depending on the organisation’s size, chosen framework, and technology investments. While not mandatory, having an ORM framework is highly recommended. A small organisation might require a few months, while large enterprises with complex operations could take a year or more. ITIL or NIST may be more suitable for organisations with significant IT or cybersecurity needs. For instance, a healthcare provider could use NIST to safeguard patient data and prepare for potential ransomware attacks.
Proactive Risk Management
For larger enterprises, it ensures resilience in complex, interconnected operations. For large organisations, it ensures that all departments and regions align with a unified risk strategy. For small organisations, this means streamlined processes that save time and resources. It provides clear guidelines and tools to identify, assess, and address risks systematically, minimising gaps and redundancies.
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It’s an ongoing cycle of learning, adapting, and strengthening your business. Operational risk isn’t a one-time project. Mitigation plans must be realistic, cost-effective, and tailored to the business environment. ORM feeds real-time risk insights to leadership, enabling smarter, more proactive planning. It reduces downtime and helps businesses recover quickly from incidents. ORM ensures that essential operations continue, even when disruptions occur.
The difference with enterprise risk management
Organizations that successfully align ORM within their ERM strategy gain a holistic view of risk, ensuring that operational risks are not managed in isolation but as part of an enterprise-wide effort to enhance resilience and value creation. By systematically identifying, assessing, and mitigating risks, organizations can improve operational stability, streamline processes, and optimize resource allocation. Regulatory compliance is a key driver for ORM implementation, with frameworks such as Basel III, Solvency II, and the Sarbanes-Oxley Act (SOX) setting rigorous standards for operational risk controls. ORM focuses specifically on risks arising from internal processes, people, and systems, while ERM provides an inclusive approach that encompasses all types of risk, including operational, financial, strategic, and compliance risk. If not effectively managed, operational risks can lead to financial losses, reputational damage, and operational disruptions. Operational risk management (ORM) is the systematic approach organizations use to identify, assess, manage, and mitigate risks arising from internal processes, people, systems, and external events.
This six-step operational risk management framework provides audit and advisory firms with a systematic approach to identify, assess, mitigate, and monitor risks that could compromise quality, breach regulations, or damage reputation. All this is why organizations should consider incorporating automation into their operational risk management efforts. There are several other challenges and pitfalls organizations need to face as they seek to develop effective operational risk management (ORM). Rigorous operational risk management can provide organizations with numerous benefits. It should be clear that operational risk management needs to be conducted thoroughly, with processes and protocols in place to identify and address all known risks.
Whether it’s a security lapse, compliance failure, or unreliable documentation, third-party vulnerabilities can have a direct impact on your internal workflows. Operational risks often stem from external relationships, particularly suppliers and vendors. The right controls should integrate into daily operations without slowing teams down, especially in fast-moving industries like FinTech or HealthTech. Controls are safeguards that reduce the chance or impact of a risk. Once risks are prioritized, you need to decide how to handle them. Procurement and security teams can use tools like risk heatmaps, key risk indicators (KRIs), and scenario analysis to quantify risks and determine which ones require immediate action.