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Operational risk management (ORM) is defined as a continual recurring process that includes risk assessment, risk decision making, and the implementation of risk controls, resulting in the acceptance, mitigation, or avoidance of risk.
ORM is the oversight ofoperational risk, including therisk of loss resulting from inadequate or failed internal processes and systems;human factors; or external events. Unlike other type of risks (market risk, credit risk, etc.) operational risk had rarely been considered strategically significant by senior management.[1]
TheU.S. Department of Defense summarizes the principles of ORM as follows:[2]
TheInternational Organization for Standardization defines the risk management process in a four-step model:[3]
This process is cyclic as any changes to the situation (such as operating environment or needs of the unit) requires re-evaluation per step one.
TheU.S. Department of Defense summarizes the deliberate level of ORM process in a five-step model:[2]
TheU.S. Navy summarizes thetime-critical risk management process in a four-step model:[4]
The three conditions of the Assess step aretask loading, additive conditions, andhuman factors.
This refers to balancing resources in three different ways:
This is accomplished in three different phases:
Operational Risk Management (ORM) is not just a compliance requirement; it's a foundation of business strategy that ensures long-term success. Implementing an effective operational risk management framework offers many benefits for businesses including,
The integration of operational risk management processes helps companies realize significant benefits, such as developing intellectual capital and management techniques that can be applied across various branches to mitigate crises and solve operational problems.[5]
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The role of the Chief Operational Risk Officer (CORO) continues to evolve and gain importance. In addition to being responsible for setting up a robust Operational Risk Management function at companies, the role also plays an important part in increasing awareness of the benefits of sound operational risk management.
Most complex financial institutions have a Chief Operational Risk Officer. The position is also required for Banks that fall into the Basel II Advanced Measurement Approach "mandatory" category.
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The impact of theEnron failure and the implementation of theSarbanes–Oxley Act has caused several software development companies to create enterprise-wide software packages to manage risk. These software systems allow thefinancial audit to be executed at lower cost.
Forrester Research has identified 115 Governance, Risk and Compliance vendors that cover operational risk management projects.Active Agenda is anopen source project dedicated to operational risk management.
