Operational Risk: Types and Strategies for Effective Management

Operational risk is one of the main concerns for organizations, as it can affect the proper functioning of internal processes and jeopardize business continuity. Its impact can generate significant economic losses, reputational damage, and even regulatory sanctions.

But what exactly is operational risk? What are its main types and how can it be managed effectively?

In this article, we explore the different types of operational risks, how they impact businesses, and the best strategies for their management and mitigation.

According to Basel II, operational risk is defined as:

“The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.”

In other words, any incident that affects the normal functioning of a company, generating economic losses, affecting its reputation or diminishing the trust of customers and investors.

Operational risks can be classified into four main categories, according to their origin:

Internal Operational Risks

These are risks linked to deficiencies in the company’s internal processes. Among the most common are:

• Errors in budget planning.
• Poor execution of internal processes.
• Failure to meet deadlines with customers or suppliers.
• Impact: They can generate operational inefficiency, cost overruns, and loss of competitiveness.

Risks External to the Organization

These risks are events outside the company but that affect its operations. Key examples include:

• Natural disasters: earthquakes, fires, floods.
• Industrial disasters: power outages, telecommunications failures.
• Regulatory changes: new regulations that impact the business.
• Health crises: pandemics and public health alerts.
• Impact: They can cause disruptions in the supply chain and require strategic changes in the company.

Personnel Risks

The human factor is a key source of operational risks, which can originate from:

• Leakage or theft of confidential information.
• Industrial espionage.
• Strikes and labor conflicts.
• Lack of trained personnel for key tasks.
• Impact: It can cause legal problems, security breaches, and operational disruptions.

Technological Risks

Companies increasingly depend on technology, which entails critical operational risks such as:

• Cyberattacks and security breaches.
• Use of obsolete technology or with critical flaws.
• Failures in the implementation of new technological platforms.
• Impact: They can cause data loss, service interruptions, and high recovery costs.

To minimize the impacts of operational risk, companies must follow a structured management approach that includes identification, analysis, control, and monitoring.

1. Risk Identification

The first step is to recognize all possible threats that may interrupt the company’s operations. To do this, an assessment of internal processes, human resources, external factors, and technology must be carried out, detecting the threats that may affect each of them.

The result of this analysis can lead to a structured catalog of elements with the list of risks associated with each of them.

2. Risk Analysis and Evaluation

Once the elements and associated risks have been identified, it is important to analyze, for each of them, the probability of occurrence and the impact they would have on the organization, taking into account the existing control measures for their protection.

To carry out a correct risk analysis and evaluation process, it is advisable to use a proven methodology in the market that adequately fits the interests of the organization. Among the methodologies to consider, we can highlight:

• Qualitative analysis: This type of analysis focuses on identifying and classifying risks based on their probability of occurrence and their impact, using general descriptions (high, medium, low). It is ideal for obtaining an initial view of the risk landscape and prioritizing the most critical ones.
• Quantitative analysis: This analysis goes a step further by using numerical data and mathematical models to measure the probability and impact of risks. It is useful in complex projects or when decisions need to be justified based on concrete figures.
• Monte Carlo method: This is an analysis that allows the identification of possible risks based on multiple probabilities of occurrence. This methodology enables early identification of the probability of the organization’s activities, as well as data for decision-making.
• FMEA methodology: Failure Mode and Effect Analysis uses a methodology designed to evaluate and measure the possible effects that a technical or process failure can have on a company’s operations. The FMEA aims to provide data that can be used to generate action plans.

3. Design of Controls and Mitigation Strategies

Based on the results of the previous stage, organizations must make a strategic decision to reduce exposure to operational risk. Among the options to highlight are:

• Improvement of internal controls to prevent the materialization of threats.
• Implementation of additional controls to existing ones for risk prevention.
• Transferring risk management to third parties (Insurance Companies).

4. Monitoring and Effectiveness Testing

It is essential to continuously monitor risks and evaluate the effectiveness of the implemented controls. This can be achieved through:

• Use of indicators that allow trend analysis and, consequently, decision-making.
• Internal and external audits to evaluate compliance with the organization’s operational and technical measures.
• Crisis simulations and business continuity tests.

Operational risk is a constant threat to any company, but effective management can minimize its impact and ensure business continuity.

The key is to:

• Proactively identify and analyze risks.
• Implement adequate controls and mitigation strategies.
• Continuously monitor and improve risk management processes.

Additionally, to effectively manage operational risks, it is essential to have a GRC platform like GlobalSuite®, which allows centralized risk management, facilitates data analysis for decision-making, and optimizes the implementation of mitigation controls.

Companies that integrate advanced technological solutions in operational risk management will be better prepared to face challenges and ensure their long-term success.

Protect your company from operational risks with GlobalSuite®. Request a demo and discover how we can help you