Challenges in Operational Risk

Some of the key challenges which the risk managers come across as far as operational risk is concerned are:

Early identification of risk exposures
With the ever increasing complexity, irrespective of the sector an industry is catering to, it is always a challenge to detect the potential operational risks in the system. While not all have robust systems or processes which will raise an alarm as soon as an operational factor goes wrong and it is very evident that not all the professionals would want to willingly share the mistakes they did in this highly pink-slip driven world, lays the challenges for the Operational Risk Manager. Many a times there are no second chances to be able to fix the risk from recurring!

Proper categorization of risks
Wondering what further categorization in the Operational risk category? Yes, it is true that there are specific categories within the Operational risk domain, which are based on risk events namely ‘internal events risk’, ‘external event risk’ and ‘business event risk’.

The name itself suggests the meaning of each of these risk characteristics but what is normally overseen is that a risk which is resultant of an external event might eventually turn in to a business event risk and similarly an internal event risk might potentially cause a wide spread external risk which might impact a particular business segment or multiple segments in very high impact cases. Thus, an Operational risk manager needs to be smart and quick in understanding the movements or intentions so to say of any such event risks and take appropriate control measures to prevent it. The word ‘mitigation’ sounds very much embossed on the Operational risk framework, but the best risk manager is one who controllers the risk exposures in a manner which will not lead to the scenario where one has to take mitigating steps.

Methods used for data collection and analysis
This particular challenge is experienced by the operational risk managers in both large scale and small scale organizations in different fashions. The logic is similar to the one between the rich and poor. Like the rich has too much money, and often struggles to find the best use of it the large scale companies too have too much data and at times have too many different sources or methods or tools of collating data that a lot of times they spend developing systems which will integrate all the complex and diverse process divided not just functionally but also in geographies. In case of the small scale industries, like the poor, has to struggle to get relevant data or information to process and perform the necessary assessment. Thus, an operational risk manager, irrespective of the strength of his / her organization, constantly faces the challenge of getting relevant information using which they can understand the risk exposures in their true colours.

Being a ‘Devils Advocate’
It is unfortunate but true that all or many of the risk managers are looked upon as the devils advocate and in some scenarios as actual devils for not approving a lucrative project or for making the busy employees fill a series of check lists and certify their work! It is often a key challenge for an operational risk manager to put forward his point in a forum of senior executives who too are equally keen in the development of their organization, only in a different angle. Many times the operational risk manager’s act based on the treatment he / she will receive for being the devils advocate.

Spreading Operational Risk awareness
It is often said that the operational risk manager has to do so and so things to assess and identify the potential risks. While this is true, the most important factor which proves to be very helpful is the operations team involved in the delivery of their respective products or services to their internal or external clients. As many in operations management feel that their performance is directly proportional to their performance appraisal, it is one of the most common and I believe one of the unavoidable challenges an operational risk manager has to face.

So has all the above inspired you to be an ‘Operational Risk Manager’? If not, I hope the article would have at least helped you in providing the perspective of the Operational Risk Managers in a different light… Happy working!