Operational Risk Management (ORM) or OR Management is defined as a continuous process which involves implementation of best practices such as; assessment of risk, risk decision making and implementation of risk controls.
Those organizations which succeed in implementing these best practices achieve higher approval, lessening or evading risks to a great extent. It also involves looking over operational risks such as; insufficient or ineffective internal processes and systems, human factors and external factors. Business organizations which have not ensured best practices by implementing operational risk management have faced losses. Therefore, it is important to understand the importance of operational risk management.
There are four principles of operational risk management for best practice which are:
ORM is implemented as a best practice at three forms. These stages are;
1. In depth: This is when operational risk management is implemented before a project begins. Examples of through training, providing requirements and setting up instructions for best practice. The steps involved in ensuring in-depth ORM are:
a. Establishing the context: Identifying the risk and its nature.
b. Assessing the risk: Identifying the risk, analyzing it and evaluating it.
c. Treating the risk: Finding solutions to manage the risk.
d. Monitoring and reviewing the risk: Observing the effects of treatment.
2. Deliberate: Implementing operational risk management deliberately as a routine best practice is an ideal best practice. For example ensuring quality assurance and performance reviews. This involves five steps:
a. Identifying the hazards
b. Assessing the hazards
c. Taking decisions to manage the hazards
d. Implementing measures to control hazards
e. Observing changes after taking measures
3. Time Critical: This form of operational risk management is implemented for effective use of resources available with regards to time management by the employees of an organization. For example during a change of personnel on duty, the transfer of duties must be swift and within a short time. There are four steps involved in this form of ORM best practice.
a. Evaluate the state of affairs: Considering task loading, human factors and additive factors.
b. Evaluate your resources: This involves evaluation and leverage of resources for labor, material, equipment and information related to the hazard.
c. Proper communicate about the risks: There is the need for proper communication with people related to and affected by the hazard.
d. Executing measures and observing: Taking action and then monitoring the change for positive results.
Importance of Operational Risk Management
The importance of OR management is that it helps in identifying the control weakness of an organization. This is crucial for minimizing risk of high profile losses that organizations may face. Furthermore, there has been an increase in focus on ensuring implantation of regulations to ensure best practices in businesses. Operational risk management ensures implementation of rules and regulations in any organization enforcing compliance. Additionally, implementation of operational risk management ensures cooperative governance and transparency which is an important best practice.
Therefore, there is need for organizations to implement operational risk management guidelines to ensure effective best practice.