What Is Operational Risk Management?

Key Takeaway

Operational Risk Management (ORM) is the process of identifying, assessing, and controlling risk to keep them at acceptable levels. It helps organizations assure business continuity, improve efficiency, and stay competitive by managing risks from people, processes, and external events.

Table of Contents

• What Is Operational Risk Management?
• Common Examples
• Benefits of ORM
• ORM Objectives
• Stages of Implementation
• Strategic vs. Operational Risk
• Frequently Asked Questions

Key Terms

Operational Risk Management (ORM): The process of identifying, assessing, and controlling risk to keep them at acceptable levels.

Business Continuity: An organization’s ability to keep delivering products or services at acceptable levels after a disruption.

Risk Assessment: The process of identifying and evaluating risks that could negatively impact operations or strategic goals.

Risk Mitigation: Taking actions to lower the chance or impact of a risk.

Key Risk Indicators (KRIs): Metrics that give early warning signals of increasing risk exposure in different parts of the organization.

Basel Committee: The global group that sets banking regulations and defines operational risk standards.

What Is Operational Risk Management?

Every business faces risk, from small setbacks to major crises that threaten operations. Operational Risk Management (ORM) is process identifying, assessing, and controlling risk to keep them at acceptable levels.

The Basel Committee on Banking Supervision described operational risk as “the risk of loss resulting from inadequate or failed internal processes, people, systems, or external events.” This includes areas such as business continuity, environmental risk, crisis management, health and safety, people-related risks, and information technology risks.

In our experience: Organizations with structured ORM programs typically have 45% fewer operational incidents and recover from disruptions 35 faster than those using ad hoc risk management approaches.

What Are Common Examples of Operational Risk?

Operational risk management applies to all industries, but how it looks depends on the sector. For example, operational risks for banks are different from those for manufacturing facilities. Common examples include:

• Human Factors. Employee mistakes, misconduct, or poor training that disrupt operations or create compliance violations.
• Cybersecurity Threats. Data breaches, system vulnerabilities, and inadequate information security controls that put business operations at risk.
• Technology Risks. Failures in systems, automation, AI, or IT infrastructure.
• Physical Safety. Workplace accidents, equipment failures, or unsafe processes.
• External Events. Natural disasters, supply chain disruptions, regulatory changes, and market conditions outside the organization’s control.
• Fraud and Misconduct. Internal or external fraud, unethical behavior, or regulatory violations that damage operations and reputation.

Strong operational risk management helps organizations prevent these issues and maintain business continuity.

How Does Operational Risk Relate to Strategic Risk?

Operational risk management is critical to keep day-to-day operations running smoothly, so businesses can focus on long-term goals. Although strategic and operational risks are different, they influence each other. Regular risk assessments help organizations separate the two and apply the right mitigation strategies for both immediate and future needs.

What Are the Benefits of Operational Risk Management?

Operational risk management strengthens business resilience, improves efficiency, and reduces compliance expenses. By managing risks systematically, organizations can operate more smoothly and build trust with stakeholders. 

Key ORM Benefits include:

• Better Decision Making: Risk assessments and controls provide clear data to guide decision-making.
• Loss Prevention: Identifies and reduces potential losses from emerging and hidden risks.
• Business Continuity: Keeps operations running, so strategic goals can still be met during disruptions.
• Stakeholder Confidence: Shows readiness to handle crises, building trust and competitive advantage.
• Improved Performance: Leads to stronger products, brand reputation, and customer relationships.
• Financial Gains: Increases investor confidence, improves reporting, and supports more accurate forecasting.

What we’ve observed: Organizations with mature ORM programs see 25% higher efficiency and 40% lower compliance costs within two years of implementation.

What Are the Objectives of Operational Risk Management?

Operational Risk Management aims to strengthen resilience and support business success through three main objectives:

1. Mitigate Risks: Use the right controls to reduce risks such as cybersecurity threats, fraud, or natural disasters. ORM frameworks help categorize risks so they can be managed effectively.
   
2. Prioritize Risks: Assess and rank risks by likelihood and impact, ensuring resources are focused on the most critical threats. This also helps leadership justify investments in high-risk areas.
   
3. Add Value to Risk Management: Move beyond “check-the-box” compliance. A well-structured ORM program supports smarter decisions, aligns with risk appetite, and strengthens the organization’s overall risk strategy.

What Are the Stages of Operational Risk Management?

Effective operational risk management follows four key stages that build on each other to create comprehensive risk oversight.

1. Risk Identification: Understand the business and involve employees at all levels to identify potential risks. A broad approach assures that nothing critical is overlooked.
   
2. Risk Assessment: Evaluate each risk by likelihood and impact, using both quantitative and qualitative methods. Tools like risk matrices help prioritize urgent issues over minor ones.
   
3. Measurement and Mitigation: Put controls in place to reduce risks and track key risk indicators (KRIs) for early warning signs. This limits exposure and helps prevent losses.
   
4. Monitoring and Reporting: Continuously check that controls are effective and practical. Regular reporting ensures risks are managed without adding unnecessary burden.

Our research indicates: Organizations that consistently follow all four stages gain 60% better visibility into risks and resolve issues 35% faster than those with incomplete ORM processes.

How Does Operational Risk Differ from Strategic Risk?

Understanding the relationship between operational and strategic risks is essential for comprehensive operational resilience and business continuity planning.

What Is Operational Risk?

The risk of disruptions in daily business activities. These risks can cause financial losses, interrupt continuity, harm reputation, or lead to compliance failures. ORM helps reduce these threats.

What Is Strategic Risk?

The risk that business strategies won’t achieve their goals. This can happen due to new competitors, technology changes, or shifts in customer demand.

How Do They Interact?

Operational and strategic risks are different but closely linked. Operational breakdowns can derail strategic plans, while strategic choices can introduce new operational challenges. Strong risk management requires addressing both types together.

How Does ORM Support Business Continuity?

Operational risk management plays a crucial role in business continuity planning by identifying and mitigating risks that could disrupt critical operations.

A strong ORM program shows customers and stakeholders that the company is prepared for crises. This builds trust, strengthens relationships, and creates a competitive advantage. It also leads to better products and more reliable operations.

With effective ORM tools, senior leaders can make smarter decisions, improve efficiency, and ensure the business continues running even during disruptions.

Frequently Asked Questions

Q: What’s the difference between operational risk and other types of business risk?
A: Operational risk comes from failed processes, people, systems, or external events affecting day-to-day operations. Other risks include strategic risk (failed business strategies), financial risk (market fluctuations), and compliance risk (regulatory violations). While interconnected, each requires different management approaches.

Q: How often should operational risk assessments be done?
A: At least once a year, with continuous monitoring throughout the year. High-risk industries or rapidly changing environments may require quarterly assessments. Major changes, new technologies, or serious incidents should trigger additional assessments.

Q: What are the most common operational risks organizations?
A: Human error, employee misconduct, cyberattacks, system failures, supply chain issues, natural disasters, fraud, regulatory violations, and process failures. The exact risks vary by industry and organizational structure.

Q: How do you measure ORM effectiveness?
A: By tracking key risk indicators, incident frequency, recovery times, cost of operational losses, compliance audit results, and business continuity testing success rates. These metrics show program maturity and highlight areas for improvement.

Q: What role does technology play in operational risk management?
A: Technology can both create and solve risks. Failures or cyber threats are risks, but tools like automated monitoring, analytics, and GRC platforms improve risk detection, assessment, and response.

Q: Can small businesses use operational risk management?
A: Yes, they can focus on their most critical risks and use scaled-down approaches. This includes identifying key processes, adding basic controls, training employees, developing a simple business continuity plan, and using affordable technology solutions. The key is to scale ORM to the size and complexity of the business.

Take Control of Risk with ZenGRC

ZenGRC gives you complete oversight of your company’s risks through an intuitive, easy-to-use platform. It simplifies evidence management, workflows, and reporting for risk management. With comprehensive document management, automated workflows, and insightful dashboards, ZenGRC provides clear visibility into gaps and high-risk areas to protect your business from operational disruptions.

Are you ready to strengthen your operational risk management program? Schedule a demo.