By Shankar Bhaskaran, Managing Director – India, MetricStream
In recent years, operational risk management (ORM) has garnered significant attention from banking and financial services (BFS) regulators. The increasingly unpredictable operational landscape—characterised by fluctuating business prospects, a rise in regulations and updates, escalating service costs, and internal challenges such as operational lapses, fraud, and employee disengagement—has created a pressing need for robust operational risk management strategies in BFS organisations.
Fortunately, the leaders of BFS organisations in India are taking risks seriously. As many as 63% of Indian companies analyse regulatory and compliance data for risk management and opportunity identification, compared to a global average of 50%.
But how can organisations adopt a modern approach to operational risk management, and what essential steps are needed to implement it effectively? Let’s examine how ORM is evolving.
What is Operational Risk Management?
Operational Risk Management (ORM) is a proactive approach to identifying, assessing, mitigating, and monitoring risks that could disrupt daily operations. These risks may originate internally from factors such as people, processes, and systems, or externally due to natural disasters or regulatory changes.
ORM fosters a culture of risk awareness, empowering employees at all levels to recognise and report risks. It emphasises establishing robust controls and procedures that align with the organisation’s unique operational environment. Through continuous monitoring and reporting, ORM enables organisations to adapt to changing risks and regulatory requirements, ensuring compliance and minimising potential losses.
Integrating ORM into a business’s overall risk management strategy enhances resilience by providing a structured framework for operations. Furthermore, ORM helps organisations recover quickly when risks materialise, safeguarding business continuity and minimising disruptions.
Why is Operational Risk Management Important?
Here are the key reasons ORM is essential for businesses:
- Identifying and Assessing Key Operational Risks:
ORM empowers organisations to proactively identify, measure, monitor, and control inherent risk exposures. BFS organisations can pinpoint gaps in their risk and control frameworks through risk assessments, loss event management, and critical indicators, enabling more effective risk management. - Optimal Allocation of Operational Risk Capital:
A streamlined ORM process ensures the efficient allocation and use of operational risk capital, enhancing the organisation’s ability to respond effectively to risks. - Timely Risk Management Insights:
Supported by advanced software solutions, a robust ORM program provides decision-makers with real-time visibility into risk management efforts, high-priority risks, and emerging areas of concern. - Building a Risk-Aware Culture:
When ORM is integrated across the enterprise with strong leadership support, it fosters a culture where employees at all levels proactively identify and address risks. - Ongoing Risk Management:
ORM is a continuous, iterative process. Regular monitoring and program updates enable organisations to stay ahead of evolving risks and improve preparedness.
How to Modernise the Operational Risk Management Approach
Today, Chief Risk Officers (CROs) are not only responsible for traditional risk management activities but also for staying informed about market trends, industry best practices, and regulatory developments to align their risk and resilience strategies effectively. To meet these demands, CROs must rethink ORM programs to make them agile, forward-looking, and resilient.
Here are key considerations for modernising the ORM approach:
- Expanding Beyond Traditional Risk Types
To develop a comprehensive risk management strategy, the BFS sector must address both traditional risk types and emerging risks, such as economic uncertainty, digital vulnerabilities, human-factor risks, environmental concerns, geopolitical instability, and liquidity crises. Understanding the interconnectivity of these risks is crucial for a holistic approach to risk management. - Leveraging Predictive Analytics
CROs can harness artificial intelligence, machine learning, and advanced analytics to gain predictive insights into risks. These data-driven insights help quickly identify trends, patterns, and correlations, empowering organisations to mitigate risks and minimise operational losses proactively. - Leaning on Risk Quantification
Quantifying risks in monetary terms enables organisations to assess risk exposure and potential impact. This approach allows risk teams to prioritise risks for targeted mitigation and remediation while enabling CROs to communicate the organisation’s risk posture clearly to executive management and the board. - Developing and Maintaining an Incident Response Playbook
Maintaining a playbook with detailed response strategies for various risk scenarios is essential. In the event of a high-impact risk, pre-defined roles, responsibilities, and corrective actions improve organisational readiness and help mitigate the severity of potential impacts. - Adopting Technology-Based Solutions
Technology-based solutions enable CROs to enhance their risk management approach by automating and integrating risk management processes, improving reporting through advanced analytics, conducting autonomous assessments based on asset value and business impact, and delivering timely, actionable insights. These tools free up risk teams to focus on higher-priority tasks, increasing overall effectiveness.
Benefits of a Modern Operational Risk Management Framework
A robust ORM framework provides several benefits that help organisations safeguard their operations and ensure business continuity:
- Enhanced Awareness of Operational Risks
A well-structured ORM framework helps organisations better understand their operational risks. This increased awareness ensures all stakeholders are informed, enabling them to contribute effectively to risk mitigation efforts. - Reduced Organisational Stress
A robust ORM framework allows organisations to allocate resources efficiently to manage risks. This proactive approach identifies potential issues before they escalate, reducing operating costs, improving resource utilisation, and ensuring better preparedness for unexpected events.
Enhanced Decision-Making
A solid ORM framework enhances an organisation’s ability to manage risks, directly contributing to better decision-making and increased profit margins. With access to more information, insights, and data, organisations can develop accurate predictive models that support informed business decisions aligned with their objectives while accounting for risks’ potential impact.
