Operational Risk - an introduction

While financial and strategic risks traditionally dominate boardroom conversations, operational risk has emerged as a key focus area for management in financial services and other industries. Operational risk refers to potential losses resulting from inadequate or failed internal processes, people, systems or external events. Unlike other risk types, operational risks can directly impact service delivery and day-to-day activities.

Drivers elevating the importance of operational risk management include digital transformation, cost pressures, complex regulations, and disruptive competitive forces. Combined, these factors increase uncertainty and the potential for operational failures that negatively impact reputation, customer service, compliance, and the bottom line.

Effective operational risk management involves:

- Identifying risks inherent in business processes including HR, technology, fraud, legal, supply chain and distribution channels.

- Estimating the likelihood and potential impact levels of identified risks using data, expert judgment and scenario analysis.

- Evaluating risk exposures against predefined tolerance levels and existing controls.

- Selecting appropriate risk treatment such as avoidance, mitigation, transfer or acceptance based on residual risk assessments.

- Implementing cost-effective policies, procedures, training, controls and contingency plans tailored to critical operations.

- Monitoring early warning indicators such as customer complaints, processing errors and system outages that signal emerging operational risks.

- Capturing and analyzing internal loss data, audit findings and benchmarking data to refine risk assessments.

- Reporting key risk exposures and incidents supporting risk-aware culture and informed mitigation decisions.

Key operational risk management strategies include:

- Business continuity management to restore critical operations after incidents.

- Cyber risk and information security programs safeguarding systems and data.

- Third-party risk management overseeing outsourced processes and suppliers.

- Compliance activities upholding laws, regulations and standards.

- Insurance and risk financing to transfer loss exposures.

Benefits of mature operational risk management include avoided losses, reduced costs, enhanced controls, increased agility to address emerging risks, and greater resilience. This enables sustaining quality services despite disruptions and changing conditions.

While often considered less exciting than strategic risks, operational risks directly impact execution and value creation. Operational risk management has therefore moved from a compliance-driven back-office function to a priority embedded across all business units. With technology, outsourcing and competition increasing interdependencies and complexity, vigilant operational risk management remains indispensable for operational excellence.

DecideWright is a UK-based consultancy that delivers solutions in the areas of Strategy Execution and Enterprise Performance Management, Enterprise and Operational Risk Management, Operational Resilience including DORA and Measurement & Metrics, including KPIs & OKRs.

Contact us to see if we are the right firm for your project.