Operational risks have evolved beyond traditional challenges. The same is true for operational risk mitigation strategies and tech. As businesses expand their global footprint, they are exposed to a myriad of risks that can disrupt their operations and impact their bottom line. No industry or company is immune to operational risk. According to a report by McKinsey, loss events related to operational risks recorded in the last 5 years, resulted in losses amounting to nearly $600 billion1. A recent survey conducted across 30+ diverse industries revealed that organisations that are more resilient are defined by their ability to both foresee future challenges and capitalise on opportunities, striking a balance between risk and reward2. There is an increasingly pressing need for businesses to adopt proactive strategies to manage and mitigate operational risks.
Common Operational Risk Scenarios Faced by Businesses
- Supply Chain Disruptions: Globalisation has made supply chains more complex. A disruption in one part of the world can have a ripple effect, impacting businesses globally.
- Human Errors: Despite technological advancements, human errors remain a significant risk, from miscommunication to procedural mistakes.
- System Failures: Physical infrastructure and machinery can fail, leading to production halts or service interruptions.
- Geopolitical Events: Political unrest, trade wars, and other geopolitical events can disrupt business operations and supply chains.
The Importance of a Proactive Approach to Operational Risk Management
Operational-risk events can tarnish a company’s reputation among its stakeholders. Shareholders, for instance, take these events seriously. Following an operational-risk event, equity losses can be, on average, five times greater than direct financial losses1. Hence, a proactive approach, which anticipates and mitigates risks before they escalate, is crucial.
Best Practices for Risk Identification, Assessment, and Prioritisation
- Regular Risk Assessments: Conduct thorough risk assessments to identify potential threats.
- Stakeholder Engagement: Engage with employees, suppliers, and other stakeholders to gain insights into potential risks.
- Scenario Planning: Envision various risk scenarios and develop strategies to address them.
Implementing Robust Internal Controls and Regular Monitoring
A robust internal control system can prevent many operational risks. For instance, in the airline industry, safety is paramount. Pilots can face stricter penalties for not reporting near accidents than for actual mistakes2. Such stringent controls can be a lesson for other industries.
The Role of Continuous Improvement in Operational Risk Management
Operational risk management is not a one-time task. It requires continuous improvement. As the business landscape changes, so do the risks. Companies must stay vigilant, regularly update their risk assessments, and adapt their strategies. Those that master operational resilience not only survive challenges but also thrive, unlocking future prosperity and longevity2.
Safety and security are paramount in operational risk management. Whether it’s ensuring the safety of employees in a factory setting or securing physical assets, businesses cannot afford to overlook these aspects. Global Security Operations Centres (GSOCs) play a crucial role in monitoring and responding to security threats in real-time, ensuring that businesses can operate without disruptions.
Challenges of Calculating Impact
Calculating the impact of operational risks across people, assets, and the supply chain is complex. For instance, a supply chain disruption can lead to production halts, affecting employees, and resulting in financial losses. However, the opportunities and benefits of such calculations are immense. By understanding the potential impact, businesses can prioritise their risk mitigation strategies and allocate resources effectively.
Risks of Not Using Real-time Data
In today’s digital age, real-time data is invaluable. Companies that fail to leverage this data can miss out on crucial insights. For instance, real-time data can alert businesses to supply chain disruptions, allowing them to take immediate corrective action.
A proactive approach to operational risk management can enhance a company’s reputation among its stakeholders. It can also lead to better stakeholder relationships and increased trust.
You can book a demo on resilienceOS here to discover how you can make operational risk mitigation easier, safeguarding your people and operations in real-time.
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1.Response and resilience in operational-risk events – McKinsey & Company
3It’s Time for a New Model for Operations Management – Harvard Business Review
4Financial institutions and nonfinancial risk: How corporates build resilience – McKinsey & Company