Several industries and organisations experience difficulties, particularly in risk management. These risks mostly result from ineffective internal procedures or external problems that can hamper the operating processes. Operational Risk Management, in such situations, can be regarded as the only breakthrough, as it tends to minimise risks through various processes such as identification, assessment, monitoring and reporting.
More like a process, Operational Risk Management allows for decreasing risks via financial reporting which is prevalent in almost every business organization. After these reports, it is easier for such organizations to estimate where these risks can originate from and how these problems can be easily combatted.
Table of Contents
- 1 What is the importance of Operational Risk Management?
- 2 How does Operational Risk Management Function?
- 3 What are the varied challenges of Operational Risk Management?
- 4 What are the steps to develop strong Operational Risk Management Programs?
What is the importance of Operational Risk Management?
Since Operational Risk Management eliminates risks by identifying unsafe conditions, it allows to lessen a lot of errors across businesses. The following reasons suggest why these programs are highly important in firms:
Improvement in Decision Analysis:
Since these programs are concerned with the identification of risks, it also allows us to understand better and implement necessary strategies which help to complete projects. After well-informed decisions, proceeding turns out to be easier and smoother functions can be employed.
Creation of better products:
When risks are minimized within an organization, consistent products are created by them. This would naturally indicate that the company is highly reliable and will have customer loyalty. Even such high-quality products can enhance internal functioning, leading to greater identification of risks.
Maintains transparency within the organization:
This program enables a company’s members to communicate their requirements on an internal level. Such communication often leads to greater decision analysis as well as proper financial reporting. These connections also maintain the safety of the employees within an organization, making it mutually beneficial for all.
Effective financial forecasting:
Risks related to these organizations are mostly financial in nature. Financial forecasting plays a vital role as it allows one to determine a particular budget, financial decisions, and investments. This would create more enhanced financial reporting, yielding greater positive results.
How does Operational Risk Management Function?
Once firms decide to deal with operational risks, there should be four stages to initiate a risk management segment. Since the goal of such management is to reduce and diminish all the risks to a certain level, decision analysis plays a vital role to establish all these four stages.
The four objectives of operational risk management are as follows:
Identification of Risks
This can be regarded as the primary step because it identifies what can be wrong or which areas are highly problematic. A control framework is mostly utilised in such cases in order to remove all the risks completely.
Assessment of Risks
An impact and likelihood scale is used in order to assess all the risks properly prevailing within an organization.
Measurement and Mitigation of Risks
This works simultaneously with risk assessments within a firm. These risks while being assessed are measured on a consistent scale to prioritize risks and rank on a comparative level. The measurements are also used to understand the costs required to control all the risks.
Monitoring and Reporting of Risks
Monitoring of risks occurs through an assessment to understand the problems and instigate changes. These are finally reported to any senior officer, a certified management accountant to be more specific. Then, the last reports are submitted to the board of the firm in order to facilitate decisions.
What are the varied challenges of Operational Risk Management?
Only having a system of Operational Risk Management is not the smartest decision that can be considered by businesses and organizations. Operational Risk is not stagnant, it is more like a chain reaction which leads to the lack of assessing control failures and issues which can also disintegrate or demolish several businesses.
However, these risks should not be associated with strategic or reputational risks, even though Operational risks are a sub-division of Enterprise Risk Management.
The various challenges related to Operation Risk Management are as follows:
The Process is confusing and complex in nature-
Operational risks are turning out to be more complex and confusing day by day since organizations are going through several advancements, particularly in the fields of technology, profit margins, and competition due to globalisation.
Decision analysis is getting more difficult in Operation Risk Management because several organizations utilize these systems everywhere, creating a greater emergence of risks in unexpected areas.
Disconnected Systems and Programs-
Since Operation Risk Management appeared to be a reactive function, most organizations led to several disjointed consequences, over-engineered systems, and metrics related to compliance and regulations.
What are the steps to develop strong Operational Risk Management Programs?
Some areas should be covered if a strong Operational Risk Management program is desired to be operated to avoid shortcomings.
The following steps are:
Set Up Operational Risk Management as a fundamental system:
This should be a necessary function utilized by all organizations because responsibilities will be clearer and will have an overall understanding related to the value proposition.
Focusing More on Change:
High-end technology should be used to increase the value of such programs as well as understand the risks in C-suites and organizations.
Operational Risk Management as a stand-alone segment:
No other bodies should intrude in the working of Operational Risk Management programs. It hampers the functions and creates greater risks, once a secondary body is also present.
Operational Risk Management as a Partner:
This program should be viewed more as a partner and not a competitor so that functions can be properly identified without any further complications.
The need for Operational Risk Management in organizations is growing day by day. The process allows deepened relationships in the business, allowing greater underlying processes. It can be considered more of a necessity than just an addition to business value.
In order to learn more about this management system, Imarticus Learning’s US CMA Course can be regarded as the best option, especially to become a certified management accountant. This course will take place for over 6-8 months and is an advanced level credential for the ones who want to delve deep into the world of finance and accounting.
For more information, please visit Imarticus Learning.