Importance Of Operational Risk Management


risk management
Risk Management concept image with business icons and copyspace.

The year 2020 began well, and everything was going fine until Covid-19 struck. Businesses had to shut down, employees were let go, and the economy almost came to a standstill. This pandemic has proven that institutions, businesses, etc. are underprepared for external shocks. They have no clue how to tackle the financial and operational risks that they’ve been experiencing. However, businesses with operational risk managers are having an easier time adapting to the pandemic.

Once this pandemic is over, businesses will change their view of operational risk management as its importance has become even more apparent.

What is Operational Risk Management?

Every business face challenges that could disrupt business operations, trigger huge losses, or force them to shut down. For example, a data breach could result in fines, lawsuits, or impale business operations for several days. A physical event such as a hurricane or pandemic could affect business operations.

These are risks that businesses can manage by trying to understand the risks and how they can impact the business. The risks are categorized into several categories, which include; operational, information, personnel, and legal compliance.

Operational risk management seeks to mitigate risks resulting from internal and external fraud, damage to physical assets, delivery and process management, business disruptions, etc. 

What are the Benefits of Operational Risk Management?

Operational risks pose a huge threat to your business, but through operational risk management, you can enjoy the following benefits:

Mitigating Cyber Risk

Cyber-attacks have become too common; the attackers are constantly evolving and improving their attacks. Cybersecurity is highly underestimated, but a single breach could affect a business in many ways. This is an operational risk that you need to identify, understand, and figure out ways to mitigate it. Most of the cybersecurity breaches can be mitigated by upgrading your security protocols. While it’s expensive to develop and maintain such systems, it pays off by reducing the incidences of cyber-attacks.

Better Regulatory Compliance

The expectations of consumers, stakeholders, and governments continue to increase, which is forcing businesses to comply with the ever-changing regulations. This is presenting a certain degree of compliance risk to the businesses as they stand to lose more from non-compliance.

Non-compliance could have a legal impact on your business, typically involving fines, imprisonment, product seizures, etc. It could also have a financial, business, or reputational impact on your business. By incorporating operational risk management, businesses can identify all their compliance requirements and fulfill them before they impact the business.

Better Decision Making

Most businesses make decisions without knowing all the information about the risks involved, available alternatives, and consequences of the decisions. In such scenarios, the business owners make decisions based on experience, assumptions, and their judgment. However, managers can improve the decision-making process by incorporating risk analysis.

This approach involves analyzing the nature and size of the risks involved. For example, if a business decides to launch a new product, it needs to analyze all the variables involved. These variables include capital investment, cost of production, marketing, market size, retail price, etc.

Every business needs to form a well-established relationship between decision making and risk management.

Customer Satisfaction

It’s easier and cheaper to maintain existing customers than it is to attract new customers. Operational risk management helps you identify the risks that could jeopardize your relationship with your existing customers. For instance, if you have a supply problem that is causing delays in product delivery, you need to fix or switch to a better supplier. Another issue is unskilled personnel, which leads to inferior quality products, poor customer interaction, and lack of accountability.

Keep in mind that happy customers are loyal, more likely to recommend your business to others, and less susceptible to competition. By understanding the issues that cause poor customer satisfaction, you can fix them and enjoy a better relationship with your customers.

Better Insurance Premiums

The first step to any operational risk management strategy is to understand the business’ risk profile. The operation risk manager is required to map and create a database of internal and external operational risks. Once you have identified the risks, you can train your staff to anticipate and mitigate the risks. Also, incorporate operation risk management into your business culture as risk management affects the operations of your entire business. Such a business that understands its risk profile knows which risks are easy to avoid, accept, reduce, and transfer. With such knowledge, you can negotiate better premiums according to your insurance needs.

Wrapping Up

Operational risks continue to plague all businesses; it’s dawning on these businesses that they need to embrace operational risk management if they want to survive and thrive.