Magazine article Risk Management

Top Ten Requirements for Operational Risk Management

Magazine article Risk Management

Top Ten Requirements for Operational Risk Management

Article excerpt

Although operational risk is difficult to quantify, significant benefits can be gained from its successful management. The following ten steps to operational risk management can help increase the likelihood of achieving business objectives and reduce operational losses:

1) Define it, and move on. Many initiatives do not get off the ground because too much time is spent trying to come up with the perfect definition for operational risk. Instead, a company should adopt a common definition, such as "risk of loss due to failures in people, processes and systems or an external event," or create a more tailored and workable definition, which can always be changed later on.

2) Put someone in charge. While it is true that operational risk management is everyone's job, someone needs to be accountable for developing its infrastructure, policies and outcome measurement, as well as integrating its activities within the overall enterprise risk management program. While a cross-functional committee should be established to develop and implement operational risk controls, one operational risk officer should be appointed to have overall responsibility for the project.

3) Have a Letterman list. A common complaint from board members and senior management is that they get too much data and not enough information. Every company should identify the top ten risks it faces, using self assessments, risk maps and operational risk metrics.

In many cases, these risks can account for over 80 percent of potential losses. Further, each risk should be specific enough to be actionable, and management methods should be tested against historical losses and incidents to ensure quality.

4) Know your losses. Until recently, most companies did not systematically capture the levels, trends and sources of operational risk losses. Specific losses are often netted against revenue or grouped in a generic error account. Companies should include operational losses as part of the general ledger and management reporting. Specific incidents such as policy violations and systems outages should also be included.

5) Have good brakes. Some compare risk limits to brakes on a car and worry that they will slow down a business. But while brakes do allow a car to slow down or stop when it needs to, they also give the driver the confidence to go even faster (e. …

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