In today’s business world, uncertainty can strike at any time, whether it’s human error, complex internal processes, system failures, or external events like natural disasters and economic crises. To withstand these challenges, organizations need structured approaches such as risk assessment, risk management, and crisis management to maintain stability and continuity. Collectively, these form the foundation of Operational Risk Management (ORM), a vital concept for ensuring business resilience and sustainable growth.
HIGHLIGHTS:
- Operational Risk Management is the process of managing risks arising from systems, processes, people, or external events that affect daily business operations.
- It helps organizations prevent business losses caused by unexpected events such as fires, floods, IT system outages, or human error.
- It differs from Enterprise Risk Management (ERM) by focusing specifically on “operational risks”.
- Effective ORM involves six key steps: defining scope, identifying risks, analyzing risks, evaluating risks, implementing treatments, and recording/reporting outcomes.
- Organizations that implement ORM effectively enhance their resilience and competitiveness in the long term.
- From the frequently asked questions, it is clear that Operational Risk Management is not just an additional tool but a critical foundation that enables organizations of all sizes to systematically manage risks. Establishing and regularly reviewing ORM should be regarded as an investment in long-term sustainability and a way to strengthen competitiveness in today’s dynamic business environment.
What is Operational Risk Management?
Operational Risk Management is the management and control of operational risks that arise from an organization’s day-to-day activities. These include human errors, process inefficiencies, technology failures, or external factors such as natural disasters, emergencies, or cyberattacks. Unlike strategic or financial risks, ORM focuses on managing the “risks that occur in daily operations”, which may directly result in damage such as production disruptions, data loss, or even reputational harm to the organization.
How is Operational Risk Management Different from Enterprise Risk Management?
While Enterprise Risk Management (ERM) provides a broad framework to address all types of organizational risks (strategic, financial, legal, reputational), Operational Risk Management focuses specifically on operational risks.
Comparison
Operational Risk Management
Enterprise Risk Management
Scope
Operational risks: systems, processes, people, external factors.
All business risk types: strategy, finance, legal, and reputation.
Objective
Minimize disruption to daily operation.
Balance overall organization risks.
Stakeholders
Operations teams and risk management teams
Board of directors and senior management
Approach
Broader frameworks such as COSO ERM ISO 31000
Thus, Operational Risk Management is an essential component of Enterprise Risk Management, ensuring organizations can manage everyday events effectively.
Why is Operational Risk Management Important?
-
Enhances Business Continuity
Without Operational Risk Management, even minor incidents can escalate into major disruptions. For example, a server outage lasting just two hours could cause significant financial and operational damage. -
Protects Organizational Reputation
Seemingly small mistakes, such as miscommunication or ineffective communication, can result in negative publicity. Operational Risk Management helps organizations establish preventive measures to safeguard their reputation. -
Reduces Financial Losses
Effective risk management minimizes repeated errors and lowers the likelihood of emergencies, ultimately saving the organization from unnecessary financial losses. -
Builds Stakeholder Confidence
A strong risk management system inspires confidence among investors, clients, partners, and even employees, reinforcing trust in the organization’s ability to operate securely and reliably.
What Are the Steps of Operational Risk Management?
To achieve maximum effectiveness in operational risk management, organizations must not only recognize potential risks but also implement systematic approaches to manage them. Understanding the key steps in Operational Risk Management is crucial for minimizing the impact of unexpected events and ensuring business continuity.
Step 1: Scope and Criteria
Defining the scope of risk management is a critical first step, for example, identifying which departments, processes, or projects are covered. Organizations must also establish criteria for decision-making, such as the severity of impact and likelihood of occurrence. This step serves as the foundation that gives direction and clarity to the risk management process.
Step 2: Risk Identification
Identify risks comprehensively across people, processes, technology, and external factors such as natural disasters or supply chain risk. This step ensures that organizations can “see the whole picture” before deciding how to respond.
Step 3: Risk Analysis
Analyze each identified risk in detail, including its sources, causes, mechanisms, and potential impacts, both operational and broader consequences. This deeper understanding helps organizations make informed assessments.
Step 4: Risk Evaluation
Assess and prioritize risks by considering the combination of likelihood and impact. Compare risks against the criteria established in Step 1 to determine which should be addressed immediately and which may be acceptable.
Step 5: Risk Treatment
Select appropriate strategies to address risks, such as avoidance (eliminating the risk), mitigation (reducing its impact), transfer (e.g., through insurance), or acceptance (acknowledging and tolerating residual risk).
Step 6: Recording and Reporting
Document all aspects of the risk management process, including methods used, outcomes achieved, and decisions made. Regular reporting to management and stakeholders supports effective monitoring and continuous improvement.
What Are the Benefits of Operational Risk Management?
Implementing Operational Risk Management does more than just reduce risks or prevent losses—it also creates long-term value for organizations. ORM strengthens financial stability, operational efficiency, and organizational credibility, enabling sustainable business growth.
- Reduces financial losses that may result from errors or emergencies.
- Ensures business continuity even in the face of unexpected events.
- Builds confidence among customers and investors, reinforcing trust in the organization.
- Cultivates a risk-aware culture (Risk Culture) across the organization, embedding resilience into daily operations.
What Are the Limitations of Operational Risk Management?
Although Operational Risk Management (ORM) provides significant benefits, organizations should also recognize its limitations:
- Cannot eliminate risks entirely: In today’s dynamic environment, new risks continuously emerge, making 100% prevention impossible.
- Requires investment in resources and personnel: Effective ORM demands adequate funding, skilled staff, and dedicated tools to function properly.
- Depends on organizational culture: Without strong collaboration and commitment from employees, ORM systems may not be sustainable.
- Complexity in assessment: Certain risks, such as reputational damage or social impacts, are inherently difficult to measure and evaluate.
Frequently Asked Questions (FAQs)
What are some examples of Operational Risk Management?
- Business Continuity Plan (BCP): A continuity plan that enables organizations to operate even during emergencies.
- Business Impact Analysis (BIA): An analysis of business impacts and processes to determine which are most critical and should be restored first.
- Crisis Management: The management of emergencies and crises to control events and minimize damage, such as developing a fire emergency response plan.
What are the advantages of implementing Operational Risk Management?
A well-implemented Operational Risk Management framework increases organizational resilience, enabling effective responses to unexpected emergencies. It reduces disruptions, minimizes business impacts, and strengthens trust among customers, partners, and investors by demonstrating reliable and safe risk management practices.
How is Operational Risk different from Financial Risk?
Operational risk relates to risks from daily operations such as human error, process breakdowns, or system failures. In contrast, financial risk involves risks related to investment, cash flow, and financial markets. The distinction is critical because each requires different management methods and tools.
How is Operational Risk Management related to BCP and BCMS?
Operational Risk Management forms the foundation of BCP and BCMS by identifying, analyzing, and evaluating operational risks that may cause disruptions. These insights are then used to design emergency responses and contingency plans, ensuring organizations can respond effectively to incidents.
Do Small Businesses Need Operational Risk Management?
Yes. Just like large enterprises, SMEs can face severe disruptions and losses without effective risk management. Operational Risk Management helps businesses of all sizes prepare for risks and minimize potential impacts.
How often should Operational Risk Management be reviewed and updated?
Operational Risk Management should be reviewed at least once a year, or more frequently when significant changes occur, such as new regulations, emerging technologies, or crises. Regular updates ensure that organizations remain capable of managing new and evolving risks effectively.
What standards can guide Operational Risk Management?
Commonly referenced standards include ISO 31000 Risk Management Guidelines for general risk management, Basel II for financial sector risk, and ISO 22301 Business Continuity Management Systems Requirements for business continuity. Referencing these standards enhances credibility and ensures Operational Risk Management is systematic and structured.
How does Operational Risk Management help reduce business costs?
Operational Risk Management reduces expenses from repeated mistakes, delays in operations, and unexpected incidents. By improving efficiency in resource utilization and preventing emergencies, it lowers both immediate and long-term operational costs.
Implementing Operational Risk Management with InterRisk Asia
Operational Risk Management is a vital tool for protecting organizations from operational risks that can arise every day from human error to large-scale disasters. A strong ORM framework enables businesses to grow sustainably, remain stable, and stay competitive in the long term.
At InterRisk Asia, we provide comprehensive services ranging from risk assessments, BCP development, BCP training, and simulation exercises, to end-to-end consulting. Our team of experts brings extensive experience across multiple industries to ensure your organization is well-prepared. If your company is seeking a trusted partner to build a robust operational risk management system, InterRisk Asia is the answer. With us, you can be confident that “even in times of crisis, your organization will never falter.”
InterRisk Asia is a leading business continuity consulting firm in Thailand, operates under the MS&AD Group from Japan.
Experienced consultants with hands-on BCMS expertise
Customized planning tailored to your business context.
Practical tools and templates, with expert support for testing and improvement.
