Operational risk is the risk of a change in value caused by actual losses incurred as a result of inadequate or failed internal processes, people and systems, or from external events.
This risk arises largely from a failure of controls and procedures or a breakdown in the organisational processes, materials supply, equipment or as a result of people performance failure. Operational risks can arise from a multitude of other risk areas e.g. regulatory, financial, crime, HR/people (including health and safety), IT/Technology, socio-economic and environmental.
This risk can manifest in financial losses, legal implications around non-performance, reputational damage and ultimately balance sheet stress and organisational failure.
Operations are responsible for the transformation of resources, materials, labour or data inputs into desired goods, services, or results, in order to create and deliver value to the customers. Two or more connected operations constitute a process. It is important that these processes are all managed in order to ensure the delivery of products and services as required.
Operational risk management starts with a review of all the operational processes in the organisation and their associated risks. This also needs to cover a review of all suppliers and service providers to the organisation. An organisation then needs to factor in continuity and contingency plans in the event of disruptions or disasters.
Effective operational risk management will ensure that the organisation is in a position to consistently deliver quality products and services on time.
