What Is Operational Risk Management & Why You Need It

 Manufacturing organizations experience significant financial losses due to unplanned downtime—estimated at nearly $1.5 trillion annually for Fortune Global 500 industrial companies. This figure reflects the heightened costs associated with inflation, increased production line complexity, and extended recovery times despite a decrease in overall incidents. 

Operational risks such as system failures, human errors, and security breaches are primary contributors, directly impacting productivity and profit margins.

Operational risks threaten efficiency, productivity, financial stability, and brand reputation. A robust Operational Risk Management (ORM) strategy helps you fight both expected and unforeseen challenges. This approach ensures business continuity, protects reputation, and secures financial stability by identifying, assessing, and mitigating risks.

ORM is especially critical in industries with high operational complexity or strict regulatory standards. Sectors like healthcare, insurance, and manufacturing face heightened risks, from data breaches to compliance violations. Effective ORM helps these industries maintain operational continuity and remain competitive.

In this article, we’ll learn what operational risk management is, its key components and framework, and the different types of operational risks.

What is operational risk management?

Operational Risk Management (ORM) is a structured approach to managing risks that could disrupt daily business functions.

The ORM process identifies and addresses risks from internal sources, such as people, processes, and systems, as well as external events, including regulatory changes or natural disasters. These risks can manifest as system failures, employee errors, or compliance lapses, which can result in severe operational and financial setbacks if left unchecked.

A comprehensive ORM framework operates through a series of steps—risk identification, assessment, mitigation, and ongoing monitoring. Initially, ORM pinpoints potential vulnerabilities, such as outdated systems or inefficient processes, and evaluates their likelihood and impact. 

This approach is particularly valuable in industries like healthcare, manufacturing, and financial services, where strict regulatory standards and complex operations demand proactive risk management. For example, healthcare organizations may contend with data security risks, while manufacturing faces challenges related to production process reliability.

ORM frameworks also implement monitoring mechanisms, including KRIs, to track risk exposure and guide decisions at both operational and executive levels. Integrating ORM into daily workflows supports compliance and enhances competitive positioning through informed risk-conscious strategies.

Proactive ORM reduces potential losses and builds resilience against unforeseen disruptions, ensuring stable and efficient operations over the long term.

The key components of ORM

Effective operational risk management is built on several critical components that work together to identify, assess, and control risks. Let’s break them down.

a. Risk identification

Risk identification is the foundation of ORM. This involves systematically detecting risks before they can impact operations:

• Internal processes: Analyze key operational areas, such as production workflows, IT systems, and supply chains, to find vulnerabilities.
• Historical data: Study past incidents to spot trends and recurring risks.
• Scenario analysis: Use hypothetical scenarios (like cyberattacks or system failures) to test preparedness and improve responses.
• External factors: Monitor regulatory changes, market trends, and geopolitical events that could pose risks.

b. Risk assessment

Once risks are identified, businesses must assess and prioritize them based on their potential impact and likelihood. A clear assessment of risks allows companies to allocate resources effectively and make smarter decisions:

• Risk prioritization: Use tools like risk matrices to evaluate and rank risks. Those with high impact and likelihood require immediate attention.
• Risk appetite: Define the company’s risk tolerance and ensure it aligns with business objectives. This helps decision-makers determine which risks are worth taking and which need mitigation.

c. Risk mitigation strategies

After risks are assessed, businesses need to decide how to manage them. Common risk mitigation strategies include:

• Avoidance: Steering clear of high-risk activities. For example, choose vendors with better security standards to avoid data breaches.
• Transference: Shifting risk through outsourcing or insurance, such as using cyber liability insurance to cover data security incidents.
• Acceptance: Acknowledging certain risks that have minimal impact and may not require extensive controls.
• Mitigation: Implementing controls to reduce risk impact. For example, invest in VPNs and multi-factor authentication to protect sensitive data.

Combining these strategies allows businesses to minimize risks while ensuring operational efficiency.

d. Risk monitoring

Risk monitoring ensures that mitigation strategies remain effective over time. KRIs help track risk levels in real-time, enabling timely adjustments:

• Employee absenteeism: Increased absenteeism could signal internal issues or hazards.
• Cybersecurity incidents: Tracking incidents can help identify IT vulnerabilities before they escalate.
• Operational performance: Sudden drops in performance may point to operational inefficiencies or emerging risks.

Tips to build a strong operational risk management framework

A robust operational risk management framework is essential for businesses to manage and mitigate risks proactively. Integrating ORM into daily operations helps organizations protect their financial health, maintain compliance, and ensure smooth business continuity. 

a. Developing a robust ORM framework

A strong ORM framework consists of the following components:

Risk identification

This step involves conducting detailed assessments of internal workflows, IT infrastructure, and operational processes to pinpoint vulnerabilities. Businesses must also examine external factors, such as market trends and regulatory changes, that could introduce new risks. 

Scenario analysis plays a critical role here, helping organizations anticipate potential disruptions by simulating threats like cyberattacks, supply chain failures, or operational bottlenecks.

Defining risk appetite

Clearly defining the organization’s risk appetite is essential for aligning risk management with strategic objectives. This step involves determining the level of risk the business is willing to tolerate in pursuit of its goals.

For instance, a company might be willing to accept certain IT risks to innovate quickly but may be less tolerant of risks that could damage compliance or reputation.

Risk & Control Self-Assessment (RCSA)

Continuous evaluation of internal controls is essential for ensuring they remain effective as new risks emerge. The RCSA process enables organizations to assess how well their mitigation measures are working and make necessary adjustments.

For example, regularly testing cybersecurity protocols helps ensure that defenses remain strong in an evolving threat landscape.

Data collection and loss analysis

Examining historical loss data is vital to identifying recurring patterns and improving future risk strategies. Businesses can refine their risk management framework by analyzing past incidents, ensuring that similar events are less likely to occur. This data-driven approach helps prioritize risks and allocate resources more effectively.

b. Integrating ORM with Governance, Risk, and Compliance (GRC)

A comprehensive ORM framework should seamlessly integrate with an organization’s GRC processes. This integration ensures that risk management policies and procedures are applied consistently across departments, fostering a unified approach to risk management. 

With ORM and GRC working in tandem, organizations gain better oversight, ensuring compliance with regulatory requirements while enhancing overall governance.

For example, an organization integrating ORM with its GRC efforts can streamline compliance reporting, improving both efficiency and accuracy when responding to regulatory audits. This holistic approach to GRC fosters a cohesive risk management culture, enabling better strategic alignment across all risk-related activities​.

c. Embedding ORM into daily operations

To be truly effective, ORM must be embedded into every facet of the organization’s daily operations. This includes integrating ORM with other key risk areas, such as market, credit, and liquidity risks, to provide a holistic approach to managing threats. 

When ORM becomes part of the company’s routine activities, real-time risk detection and response become possible, allowing businesses to address risks as they emerge.

The three lines of defense model is essential for ensuring that ORM is deeply integrated into daily operations:

• First Line: Operational managers and employees directly manage risks within their roles, ensuring that risks are mitigated at the operational level.
• Second Line: Risk management and compliance teams support the first line, providing guidance and ensuring identified risks are handled effectively.
• Third Line: Internal audit functions offer independent assurance, evaluating the effectiveness of ORM practices and ensuring they align with strategic objectives.

This structure allows businesses to adapt to risks as they emerge, ensuring that ORM is an integral part of the organization’s resilience and continuity efforts​.

Different types of operational risks you should know about

We’ve seen the various ORM process steps, but operational risks also come in many forms, each posing unique challenges to an organization’s stability and continuity.

Let’s explore the common operational risk examples businesses face.

a. Process risks

They occur when internal workflows break down, leading to inefficiencies and costly disruptions. These risks are particularly critical in industries like manufacturing and logistics, where smooth operations are important.

Manufacturing failures

Equipment malfunctions or production line breakdowns can cause downtime and defective products. For example, a malfunctioning machine might halt production entirely, leading to delayed shipments and financial losses.

Supply chain disruptions

Poor vendor management or logistical failures can halt production. When suppliers miss deadlines, businesses face unfilled orders and lost revenue opportunities. An example might be a supplier unable to deliver materials due to a shortage, stalling production, and affecting deadlines.

Internal control failures

Weak internal controls expose businesses to fraud or compliance issues. For example, a lack of oversight in procurement could lead to unauthorized purchases, resulting in financial misreporting or potential regulatory breaches.

Process misapplication

Even well-designed processes fail if not executed correctly. For instance, in healthcare, if safety protocols aren’t followed, both patient outcomes and legal compliance are at risk, making consistent process adherence essential for operational success.

b. People risks

These risks arise from human errors, misconduct, high turnover, and gaps in training, all of which can disrupt operations, impact financial health, and harm an organization’s reputation.

Human error and complacency

Mistakes due to inattention, fatigue, or limited experience are common and costly. For instance, a data entry mistake in a financial report could result in significant compliance issues or financial inaccuracies. 

Mitigating these risks requires consistent training, quality control measures, and the automation of routine tasks to reduce human involvement in error-prone processes.

Employee fraud and misconduct

Internal fraud, such as falsifying expense reports, can lead to financial losses and erode stakeholder trust. 

Preventive measures—thorough background checks, strong ethical standards, and robust oversight—can help organizations maintain transparency and accountability.

Turnover and retention issues

High employee turnover disrupts workflows and increases costs due to the need for frequent recruitment and training. Losing skilled employees also drains institutional knowledge, weakening the team’s effectiveness. 

Competitive compensation, growth opportunities, and supportive work culture are essential for reducing turnover and fostering a resilient workforce.

Lack of training and skills gaps

Insufficient training leaves employees unprepared for complex tasks or evolving regulations. In regulated sectors, such as healthcare, untrained staff may make costly compliance errors. Regular, comprehensive training ensures that employees are equipped to meet industry demands and maintain compliance.

c. Systems risks

These risks, often referred to as technology risks, arise when IT infrastructure, hardware, or software fails. They can significantly impact business operations, causing disruptions, financial losses, and reputational damage. Due to the increasing reliance on technology across industries, system failures can have devastating effects.

System failures

Critical systems like servers or data centers can experience failures that halt business operations. For instance, a banking institution that suffers from a payment system outage might not only lose revenue but also damage its reputation as customers cannot access funds or complete transactions. 

The financial impact of such downtime can be extensive, especially in industries where even minutes of downtime result in lost productivity and revenue.

Cybersecurity threats

Cyberattacks, such as ransomware, phishing, and Distributed Denial of Service (DDoS) attacks, are among the most severe risks today. A ransomware attack, for instance, could shut down a company's IT systems entirely, forcing operations to a halt. 

Recovering from such attacks is both costly and time-consuming, with businesses facing prolonged downtime, data loss, and significant financial recovery efforts. Additionally, if sensitive data is compromised, reputational damage can persist long after systems are back online.

Data breaches

Breaches that expose sensitive information, like customer data, can lead to regulatory fines under laws such as GDPR or CCPA. In addition to financial penalties, businesses often struggle to rebuild customer trust after a breach, affecting long-term loyalty.

IT infrastructure failures

Outdated or inadequate IT infrastructure presents significant risks to operational stability. Frequent system outages, slow recovery times, or inefficient systems create operational bottlenecks that slow productivity and cause service delivery delays. 

Without redundancy measures in place, such as backup servers or geographically distributed data centers, businesses may experience extended downtime that can be difficult to recover from.

Mitigation strategies

1. Redundancy: Implementing redundancy measures, such as backup servers and multiple data centers, ensures business continuity even during system outages. This minimizes downtime by ensuring alternative systems can take over quickly in case of failures.
2. Cyber Resilience: Advanced security measures, like Zero Trust Architecture and threat detection tools, help organizations detect and mitigate cyber threats in real-time. Rapid response capabilities limit cyberattack damage, reducing downtime and data loss.
3. Disaster Recovery Planning (DRP): A comprehensive disaster recovery plan helps ensure critical systems can be quickly restored following a disruption. Cloud-based recovery solutions provide flexibility, allowing businesses to minimize downtime and restore operations efficiently following disruptions.

d. External Events Risks

External event risks originate outside the organization’s control and can unexpectedly disrupt business operations. These risks include natural disasters, regulatory changes, geopolitical instability, and market shifts, each requiring targeted strategies to manage effectively.

Natural disasters

Catastrophic events like earthquakes, floods, and hurricanes can cause severe physical damage to infrastructure, resulting in production delays and disruptions to supply chains. For example, hurricanes often force factory closures and cause significant delivery delays, leading to financial losses. 

Effective disaster recovery and business continuity plans are essential to restore operations and minimize downtime quickly.

Regulatory changes

Regulatory risks emerge when governments introduce new laws or amend existing ones, which can significantly alter how businesses operate. Industries such as healthcare, finance, and manufacturing are particularly sensitive to regulatory shifts. 

For instance, changes in data privacy regulations, such as GDPR or CCPA, can require businesses to overhaul their data management practices. Companies must stay vigilant, tracking regulatory developments and adjusting operations to remain compliant and avoid penalties.

Geopolitical risks

Global political instability—from military to trade disputes—can disrupt supply chains, limit market access, and introduce uncertainty. Recent examples include the U.S.-China trade tensions, which have impacted businesses dependent on international trade. 

Combined with contingency planning, geopolitical risk assessments help organizations navigate such disruptions and maintain operational stability.

Market shifts

Economic changes, evolving consumer behavior, or inflation can drastically impact a company’s financial performance. The COVID-19 pandemic, for example, forced businesses worldwide to pivot quickly, adapting to changing demand, new consumer behaviors, and supply chain disruptions. 

Regular scenario planning helps companies stay agile and respond effectively to evolving market conditions.

Why operational risk management is a must for your business

Operational risk management isn’t only about preventing disruptions; it’s a strategic asset that enhances resilience, compliance, and competitive edge. An ORM strategy shields critical assets, strengthens reputation, and reinforces financial stability, enabling businesses to meet challenges head-on.

Organizations that commit to ORM build a culture of preparedness and adaptability, ensuring that risks are effectively managed across all operational areas. Leveraging a robust ORM framework means adapting quickly to changing conditions, safeguarding customer trust, and staying compliant with evolving regulations.

Aclaimant’s platform supports this proactive approach by delivering real-time insights, automated workflows, and end-to-end risk solutions that simplify complex risk management processes.

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