Running a company is far more complex than people think. The slightest hiccup in internal processes or external events can cause a domino effect which derails the entire workflow of the business. In order to turn a profit, companies need to ensure their operational risk is under control.
If you’ve never heard of this term before, operational risk refers to the risk of losses spurred upon by faulty or failing processes, policies, events, and/or systems. These flawed procedures go on to disrupt the workflow of business operations. Some examples of events and incidents that could trigger operational risk include fraud, criminal activity, or even employee errors.
So, now that we have grasped the basics of operational risk and the disadvantages this can bring to an organisation, let’s take a look at some management techniques that businesses can adopt.
Identify Your Potential Risks
Before you can address your operational risks, you need to identify them. In order to mitigate your risk, you’ll need to understand the potential downfalls within the context of your corporation’s goals and objectives. Look for any critical dependencies in the process, systems, people, and external structures of your business.
Implement Risk Accountability
Next, it’s important that you implement risk accountability and make your employees aware of the issues you are trying to avoid. Aside from implementing a risk-aware company culture, you’ll need to let employees know that they will personally be held accountable for risk management techniques.
Quantify and Prioritise Risks
Not all risks are the same, therefore it’s imperative that you quantify and prioritise the risks by level of urgency. Factors to consider during this stage include the probability, severity, and cost to mitigate this risk. Once you have a clear understanding of these dangers and how they compare to each other, make sure to let your team know.
Three Lines of Defence Framework
One of the most popular frameworks used to manage operational risks in the workplace is known as the Three Lines of Defence, or 3LoD for short. In essence, this internal model provides structure to the risk management process by clearly outlining the roles and responsibilities of each line of defence.
Purchase a Great Insurance Policy
Last but not least, it’s imperative that you purchase a fantastic insurance policy. If your most probable and destructive risk is one that you cannot afford, then this is a sign that you might need financial support in the future. Don’t be afraid to compare quotes and shop around for the best insurance policy within your means. Although you cannot predict the future, you can adequately prepare for it.
Nowadays, the complexity and proliferation of possible risks is much higher. Previously, most companies could rely on a single auditor to identify potential dangers and implement a defence strategy. However, modern day companies don’t have the time or the resources to fight against a plethora of operational risks. Therefore, they must be proactive rather than reactive and focus on managing their operational risk.