YHTOMIT HLS RESEARCH

Operational Risk Management

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Operational Risk Management

Operational risk management (ORM) is a cyclic process which continuously assesses risks, decision making based on risks, the implementation of appropriate risk controls which help mitigate, accept or avoid risk. Thus, ORM is the strategic oversight and analysis of operational risk as well as the risk of loss which emerges as a result of failed or inadequate internal processes and organizational systems, external events or even human factors. Thus, the paper shall analyze ORM from a critical perspective in a bid to determine its application and relevance in infrastructure protection. This will help provide additional information on ORM and how it can be used to create effectiveness in security systems.

Risk management is termed as the assessment, identification, and prioritization of various risk which is usually followed by coordinated and well measured economic application of various resources to monitor, minimize and control the impact or probability of the occurrence of unfortunate events and eventually maximize the realization of potential opportunity (Cohen & Kunreuther, 2007). The main aim of ORM is to ensure that the risk of uncertainty does not interfere with normal organizational goals.

The changes in the business environment, more so due to the development of modern activities as well as the implementation of new products leads to the creation of new risks that are of greater magnitude and are consequently more complex. Some of the most affected institutions are those that deal with finances such as banks, credit facilities and other forms of sensitive operations. Such businesses are often targeted by malicious people and as a result, should ensure they are well protected through a reliable operational risk management system

An ORM can assist an organization in four main ways that is risk avoidance, risk mitigation and risk acceptance and risk transfer (Hopkin, 2017). The first phase of risk avoidance is an essential part of an ORM. The ORM through its various sections performs an exhaustive risk analysis and attempts to determine the potential risks that may arise during operations. Risk avoidance is an essential part of risk management since it enables an organization to avoid unprecedented risks by selecting between viable alternatives. An ORM is crucial in risk assessment which is consequently essential in the process of avoiding potential risks.

The second major task is the risk mitigation process. Most businesses are aware of the challenges associated with their respective operations and are fully aware that most of the risks are unavoidable. Therefore, the ORM aims to mitigate business risks by lessening the negative repercussions and impacts of known risks when the risks are impossible to avoid. Thus, ORM helps managers understand the type of risks associated with operations and some of the most appropriate ways the firms can overcome the risks by minimizing their influence on operations.

Another of ORMs key function is the transfer of business risks. Through the ORM, an organization can identify some of the uncontainable risks that can massively affect the organization. Therefore, the ORM enables the organization to determine some of the most urgent and pressing needs that must be satisfied(Lam,2014). The assets of systems with the highest risk can be transferred to third parties such as insurance companies. Additionally, organizations in the finance sector can also purchase the Errors and Omissions insurance in a bid to protect the firm from lawsuits that may emerge from unsatisfied clients.

It is only through ORM that an organization can determine its acceptable risks. Running a business without any risks whatsoever is impossible. All businesses must strike a balance between risks and revenue. Operational risk management helps determine the necessary and unnecessary risks which are part of the business. Some risks are unavoidable depending on the nature of the business while others are avoidable. Thus, the ORM enables management to understand the basics associated with risk management and also to determine the type of risks that are worth managing and those that can be avoided. Most successful businesses manage their risks effectively and as a result, overpower their competitors who are incapable of handling operational risks smoothly (Lodree& Taskin, 2008). Therefore, this highlights the essence of a functional ORM system which enables a firm to determine which risks are acceptable, the ones that are avoidable and those that are transferable.

ORM treatment of Natural hazards and Man-made risks

It is critical to note that ORM is commonly designed to handle potential risks. To explain further, the ORM is more suited to handling man-made risks since it is designed to analyze unprecedented risks and to come up with relevant solutions on how to handle the risks. However, ORMs can also be used in handling natural hazards, more so for businesses that are commonly affected by natural phenomena. Thus, an ORM can predict potential risks and threats to a business that operates in a region commonly affected by natural disasters or hazards. This highlights the convenience of the ORM in aiding an organization to plan for risk and how to mitigate the risks effectively.

Strengths and weaknesses of ORM

The ORM has numerous strengths that enable it to identify and measure risk. One of the greatest attributes of the ORM is that it enables an organization to plan for the future by understanding the risks associated with operations. Among the greatest challenges associated with running a business is the lack of knowledge of unprecedented challenges that might prove costly to operations (Stevenson & Hojati, 2007). Thus, an ORM enables organizations to plan adequately for the various methods they can use to overcome the challenges listed in the ORM. This ensures that the senior management is fully aware of the requirements that are crucial in mitigating the risks and enhancing organizational performance. ORM also enables the organization to think of better ways of improving performance. The knowledge of the various risks associated with operations enables the management to come up with better methods of running the business which not only increases efficiency but also ensures everything goes according to plan. ORM also helps management come up with alternatives that enhance performance while minimizing risk. Thus, in the long run, the organization will have increased chances of making appropriate decisions that will enable it to move to the next level.

Lack of consistency in application is one of the most substantial issues in ORM. Some managers fail to remain consistent and as a result, end up expecting the program to run itself automatically. In fact, most managers rely on ORM only at the initial stages of operations which expose the organization to the risk of an unsuccessful application. Thus, it is essential for all stakeholders to understand the importance of sticking with the ORM plan from start to finish as opposed to relying on it at the onset of the project. The ORM is an essential part of risk management that has enabled businesses to mitigate and overcome various risks that emerge during operations.

References

Cohen, M. A., & Kunreuther, H. (2007). Operations risk management: overview of Paul Kleindorfer's contributions. Production and Operations Management, 16(5), 525-541.

Hopkin, P. (2017). Fundamentals of risk management: understanding, evaluating and implementing effective risk management. Kogan Page Publishers.

Lam, J. (2014). Enterprise risk management: from incentives to controls. John Wiley & Sons.

Lodree Jr, E. J., & Taskin, S. (2008). An insurance risk management framework for disaster relief and supply chain disruption inventory planning. Journal of the Operational Research Society, 59(5), 674-684.

Stevenson, W. J., & Hojati, M. (2007). Operations management (Vol. 8). Boston: McGraw-Hill/Irwin.