Operational Risks: How They Can Hurt You and How to Manage Them

Relatively few organizations today take a proactive approach toward managing operational risk, a potentially costly oversight. In today’s post, we’ll look at the main types of operational risk and discuss why and how to mitigate them.

[Related on MHA Consulting: Checking It Twice: The Corporate Risk Mitigation Checklist]

Defining Operational Risk

Operational risk is the potential for losses or disruptions in business operations arising from internal failures in processes, systems, human errors, or external events. Left unaddressed, such risks have the power to disrupt daily operations, lead to financial losses, and harm the company’s reputation.

Many organizations consider risk at the strategic level, looking at risks in terms of the economy, their competition, the marketplace, insurance, and so on. (Risk analysis at this level is usually carried out by executives.) Unfortunately, the risks that threaten companies’ ability to carry out their operations are widely neglected, often with painful results.

The Benefits of Managing Operational Risk

Actively managing operational risk offers several important benefits to businesses. The key advantage is that it reduces the likelihood of an outage, lessening the associated costs of financial losses, reputational damage, and loss of trust.

Managing operational risk also improves efficiency, enhances decision-making, promotes compliance, increases stakeholder confidence, reduces the risk of fraud, and strengthens the organization’s culture.

Finally, as traditional business continuity, with its focus on restoring operations after a disruption, gives way to the emerging, “always-on” philosophy of operational resilience, managing operational risk is becoming essential for any organization that hopes to meet the higher expectations of the customers of tomorrow. 

Types of Operational Risks

The following are some of the most common categories of operational risks:

Process Failures

When standard processes within the company break down or are not followed.

Examples:

• Inadequate quality control procedures
• Mismanagement of supply chains leading to delays
• Overreliance on a single individual for critical tasks (single point of failure)

Human Error

These are mistakes made by employees that lead to operational disruptions or financial losses.

Examples:

• Miscommunication between departments
• Data entry errors
• Failure to follow safety protocols

System Failures

Technical issues that disrupt business operations

Examples:

• IT system crashes
• Software bugs or failures
• Cyberattacks

External Events

Events beyond the company’s control that can disrupt operations.

Examples:

• Natural disasters
• Strikes
• Supply chain disruptions due to external factors (e.g., pandemic)

Fraud and Malfeasance

Losses due to internal or external fraud.

Examples:

• Employee theft or embezzlement
• Cyber fraud by external actors
• Misrepresentation by suppliers or vendors

Legal and Compliance Risks

Failure to comply with laws, regulations, or industry standards.

Examples:

• Regulatory fines due to non-compliance
• Legal disputes with customers or partners
• Violations of labor laws or data privacy regulations (e.g., GDPR)

Reputation Risks

Damage to a company’s brand or how it is perceived.

Examples:

• Negative media coverage
• Product recalls
• Disparagement on social media

Supplier and Vendor Risks

Risks related to reliance on external vendors or suppliers.

Examples:

• Key supplier going out of business
• Delivery delays from third-party suppliers
• Vendor-supported apps or servers that are not patched regularly, creating a security vulnerability

Health and Safety Risks

Risks related to the well-being of employees, customers, or other stakeholders.

Examples:

• Workplace accidents or injuries
• Inadequate health and safety protocols
• Health crises impacting employee availability

Understanding these categories of operational risks is essential for businesses to effectively identify vulnerabilities and implement strategies that minimize disruptions, protect assets, and ensure long-term success.

Steps to Manage Operational Risks

How can an organization move from awareness of the main operational risk types to actively managing the risk to its own operations? The best method is to take a structured approach incorporating the following steps: 

Identify Risks

Using the list above as a guide, identify the potential risks specific to your organzation, looking at processes, systems, people, and external factors.

Assess and Prioritize

Evaluate the likelihood and impact of each risk, focusing on high-priority areas.

Implement Controls

Develop and apply procedures, technologies, and safeguards to mitigate identified risks. This should include measures to address the potential loss of critical technology components, such as portals to access essential third-party services. Ensure that redundancy, backup plans, and workarounds are in place to minimize disruption. This includes at the level of the business departments, independent of IT.

Monitor and Report

Continuously track risks and performance, using Key Risk Indicators (KRIs) and reporting mechanisms.

Develop Contingency Plans

Create and test business continuity and disaster recovery plans to ensure quick recovery from disruptions.

Train and Assign Responsibility

Educate employees on risk management practices and assign accountability for key risks. Ensure that training programs include strategies to mitigate single points of failure by sharing critical knowledge across the team.

Review and Improve

Regularly review risk management strategies and update them based on new insights or emerging threats.

Engage External Expertise

If the demands of managing operational risks exceed the organization’s ability or availability, consider using tools such as BCMMetrics or engaging specialists such as the consultants at MHA Consulting.  

By following these steps, companies can build a comprehensive and proactive operational risk management framework that enhances resilience and safeguards against disruptions.

Protecting Against Threats and Enhancing Resilience

Effectively managing operational risks is crucial for maintaining business continuity and achieving long-term success. By proactively identifying and addressing risks—ranging from process failures and human errors to technology vulnerabilities and external threats—organizations can significantly reduce the likelihood of costly disruptions. 

Implementing a structured approach that includes risk assessment, control measures, and ongoing training helps ensure that potential issues are mitigated before they impact operations. Ultimately, a robust operational risk management strategy not only protects against immediate threats but also boosts efficiency and enhances overall resilience.

Further Reading

• Single Points of Failure: Protecting Yourself from Hanging by a Thread
• Every Single Day: Make Risk Management Part of Your Company’s Culture
• Types of Risk: Don’t Forget to Keep Tabs on Your Long-Term Risks
• Checking It Twice: The Corporate Risk Mitigation Checklist
• The Risk Management Process: Manage Uncertainty, Then Repeat