Operational Risk Management – What is risk and how company can handle it
What is risk and how company can handle it
Operational risk is a term much dreaded in the business world. Business takes on risk, when launching new product such as new cleaning mop, or starting a new service that helps businesses save on energy bills.
Starting new project could result in financial loss, but there are also an allocation of resources, time and focus loss that has to be taken into consideration. Since whoever is working on the new project, is not working on another project that could have been more profitable. When a business launches product or a service, regardless of how well pre launch research was done, company still faces risk of losing money on that initiative.
Operational risks are part of every project that company handles, and companies accept it. All companies accept operational risk as being inevitable at some stage of production of goods and services, and the one that manages the risks best, will come out on top. A lot of business don’t realize that risks should be managed or don’t have a proper management structure to manage those risks. An enterprise that does not manage operational risks, views risk as chaotic and unorganized, where in reality with proper research most risks can be anticipated and factored into company plans.
What are the main principles of operational risk management? First, an enterprise needs to accept that they are going to face operational risks someday. Secondly, an enterprise needs to specifically identify the risks that their operations may eventually face. Lastly, an enterprise needs to identify the risk mitigation measures and develop an exit strategy in case the product or service fails.
Let us discuss the various steps to manage operational risks below:
Risk acceptance: To deny the fact that there can be no risk is to invite trouble. In fact, organizations should include risk acceptance as part of their risk management strategies. To have a business is to have risks. It comes hand in hand.
Establishing a flow of activities: You must always have a flow chart that depicts the business operations. This flow chart will give you a visual and easy to measure idea of the supply chain management, inventory management, and the delivery management activities of the firm. When you have an idea of how the business is operating and where the problems might arise, you will know the possible risk areas too. When you know the possible areas of risks to your business, you will also be able to prepare for the occurrences beforehand.
Establish risk mitigation procedures: Once the possible areas of risks are known, you must discuss possible risk mitigation measures with the experts in the area. After these measures are established, it is time to communicate the risk mitigation measures to the concerned departments. The operations manager may want to conduct training sessions for the concerned departments and ensure that the risk management measures are adequately internalized. He/she may also want to periodically check the risk mitigation preparations of the departments.
Evaluate risk mitigation performance: The operations manager should evaluate the performance of each department in the event of a risk occurring. The operations manager should see how well a department has handled a crisis situation that could have negatively impacted a deliverable. The evaluation will give the operations manager the opportunity to formulate feedback and submit suggestions for further improvement in the risk management by each department. The operations manager must focus on the fact that because of the risks, the deliverables to the client were not compromised.
There are a number of manuals available that advocate a number of risk management procedures. The operations manager may talk to the experts and adopt measures that are most appropriate in the context of the specific firm. What is required is a set of measures that serves the particular firm best.
MBA Operations Management
Expert Business Author at Ezine