Operational risks are vulnerabilities to financial loss due to failures in processes, systems, and the people using those processes and systems. Operational risk can include human error, cyber attacks, power outages, and hardware issues that result in system failures The amount and type of risk involved vary by industry and organization. Investments into a business often hinge on the level of operational risk in the firm. A business can lose money or even fail when operational risk becomes operational disaster.
Operational risks involve what happens within the organization as the company seeks to reach its goals. The way the managers and employees prioritize tasks and risk-reduction can increase or decrease the level of risk. The way the company functions depends on the choices of not only managers but also every member of the firm. Thus, operational risks can come from many sources.
For example, fraudulent activity is a critical risk that can come from any individual in the organization. Hardware and software can also pose operational risks, especially if hardware needs maintenance. Hiring decisions include an element of risk, as the company does not know how the new employee will perform when he begins work.
Vendors and fourth-party vendors can add to operational risk because they take over certain aspects of the company’s operations. For example, a vendor that is responsible for maintenance could suffer a cyber attack on its data. Since its data includes some data from the company, the hacker now has access to the company’s data. It is crucial to assess and understand operational risks that come from vendors.
Operational risks are sometimes related to active decisions. Decisions that are happening in any given moment can influence the profit or loss of the company now and in the future. To manage operational risks, then, the managers must put systems in place that control or guide those decisions in some way. When operational risks come from maintenance and security issues, controls can be put into place to mitigate those risks. The institution must also formulate plans and set up controls for dealing with related outside services supports such as the power company.
Learn even more about Managing Risk, including how to create a reliable risk assessment for your FI.
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