In today's dynamic business landscape, organisations face a multitude of risks that threaten to disrupt operations and get in the way of growth and success. National and global events over the last five years, including Brexit, Covid-19 and the war in Ukraine, have pushed operational risk management and risk resilience higher up the agenda.
While the terms sound familiar, they are distinct but interconnected concepts that organisations need to understand and manage appropriately if they want to thrive in a volatile environment.
What's the difference?
Operational risk refers to the potential for loss resulting from inadequate or failed internal processes, systems, human actions or external events. It encompasses risks such as human error, technology failures, supply chain disruptions, regulatory compliance failures, and impacts from world events and natural disasters. At its core, operational risk deals with the day-to-day vulnerabilities that organisations face in their operations.
On the other hand, risk resilience focuses on an organisation's ability to withstand and recover from any unexpected disruptions and crises, including operational risks. It involves proactive planning, response mechanisms and adaptive strategies that ensure business continuity and help to minimise the impact of adverse events.
Ignorance is not bliss
Failing to manage operational risk effectively leaves organisations exposed to potentially significant risks and can have severe consequences. First and foremost, operational risk failures can lead to financial losses, reputational damage and legal implications. Examples of this could be a cybersecurity breach due to inadequate IT systems that compromise sensitive customer data; failures to adequately test and safely roll out new systems leading to customer detriment; or as simple as a single point of failure of a component for critical systems leading to a major sustained outage. In these situations, the firm would most likely face costly legal actions and lose the trust of its customers and face potential regulatory actions.
Additionally, operational risk failures can cause supply chain disruptions, leading to delayed deliveries (of both products and services), dissatisfied customers and lost opportunities. Poor risk management can also hinder an organisation's ability to innovate and adapt to changing market conditions, putting them at a distinct competitive disadvantage.
Similarly, without a robust risk resilience strategy, organisations are more vulnerable to disruptions caused by operational failures or external shocks. This often results in prolonged downtime, revenue loss, customer attrition and even business failure. Firms that lack resilience may struggle to recover quickly and efficiently from a crisis, leading to a tarnished reputation and a loss of stakeholder confidence.
What can you do?
Your organisation should adopt an appropriately comprehensive and integrated approach to effectively manage operational risk and risk resilience, taking account of the nature and size and scale of your business. The first step is establishing a risk management framework that identifies, assesses and monitors relevant operational risks. To get this right, you should conduct regular risk assessments, implement robust internal controls and processes and invest time in fostering a risk-aware culture throughout the business.
The second step is prioritising risk resilience by developing and testing business continuity plans. This includes identifying critical functions, establishing alternate processes and infrastructure, and creating a dedicated crisis management team that can respond quickly to unexpected events. You can further enhance risk resilience by investing in technology solutions such as cloud computing, data backups and redundancy protection for systems that help ensure business continuity during disruptive incidents.
It's also vital to foster a culture of collaboration and communication across departments and external stakeholders. Building strong and transparent relationships with suppliers, customers, regulators, and industry peers enables your organisation to share best practices, insights and resources that enhance your collective ability to manage risks.
Of course, regular reviews and updates to any risk management strategies and plans based on your learnings and experiences from previous incidents are crucial to ensure you remain on the front foot and continuously improve your approach and operations.
How can Brighter help you?
Operational risk and risk resilience are essential components of an organisation's comprehensive risk management strategy. By adopting an integrated approach and implementing risk management practices, you can effectively manage operational risk and enhance risk resilience, safeguarding your long-term success.
Is it time for a Healthcheck?
Brighter Consultancy assists clients in evaluating, identifying and proactively managing critical risks across various dimensions, including risks related to systems and technology, strategy and governance, financial crime systems and controls, business operations and financial management, environment controls and more. Our services encompass evaluating and enhancing the quality and effectiveness of existing risk management arrangements, conducting comprehensive risk assessments, conducting remediation and offering expert guidance on risk mitigation strategies.
To arrange a health check for your organisation, contact the team at Brighter Consultancy today.
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