Operational risk management is an essential part of any business, as it helps to improve the effectiveness of risk management operations and strengthen the decision-making process when risks are involved. By equipping the function with objective data and measurements, it can gain a better understanding of the true level of risk. This allows operational risk management to identify and shape necessary investments and initiatives, such as digitizing operations to eliminate manual errors, changes in technology infrastructure, and decisions about product design and business practices. It can also be used as a substitute for enterprise risk management (ERM), as statistical correlations between operational risk and other forms of risk show that it is at the core of all business risks. An operational risk management framework is important because it can lead to informed trading and investment decisions.
This is especially effective if the ORM is tied to the company's appetite for operational risk. It's also important to evaluate several operational risk management service providers, as this will help create an operational risk function that encompasses agile development, data exploration, and interdisciplinary teamwork. Additionally, commercial insurance should be purchased to protect against different types of operational risk and further reduce operational risk quantum. When assessing operational risks, it's important to note that one-off business projects and programs have no historical data due to their “one-off” nature. Therefore, they should not be included under the title of operational risk.
Additionally, traditional tools have been ineffective in detecting cyber risk, fraud, behavioral risk aspects, and other critical categories of operational risk. To overcome these challenges, organizations must aggregate data and create risk analysis at scale. Finally, part of an operational assessment is being able to communicate the risks your organization has taken to the appropriate stakeholders. This includes having distinctive definitions of the functions of the operational risk function and other oversight groups, such as compliance, financial crime, cyber risk, and IT risk. With the availability of data and potential applications of analytics, organizations can transform operational risk detection from qualitative manual controls to real-time, data-driven monitoring.
