Definition
Operational risk is refers to the risks that a company or firm expects to face because of doing business in a certain region (Terry, 2010). A business can eliminate the unsystematic risk through diversification. This is because this risk is specific to a given business within the industry in which it operates. It is the risk existing after determining systematic risk and financial risk. It results from breakdowns in internal processes and systems, and it changes from one industry to another. It is therefore crucial to consider operation risk when making investment decisions to minimize human related errors.
Managing risk
This article is from the Wall Street Journal by Russ Banham (2009) and it discusses how to view risk as an opportunity and the risk-based approaches to decision making gain tractions. As organizations endeavor to grow, they should focus on risk management. These organizations should assess their strategic and operational risk in relation to the current unpredictable economic behavior. The government is imposing stiff rules to companies on how they manage their operations. The responsibility of these companies is to manage systematic risks and put in place elaborate risk monitoring and management programs.
In the current economic crisis, better management of operation risk places a company at a competitive advantage over others. Enterprise risk management is a new method for identifying, assessing and managing financial, strategic and operation risk. Most organizations are implementing this method as a requirement from the government and because it is effective. It summons companies to view risk as an opportunity where they can invest their capital in other profit generating activities. It helps the organization to achieve its goals and reduce earnings instability through better risk management.
Enterprise risk management (ERM) involves several stages. Every organization goes through the implementation process in a different way. This depends on the organization’s main goals, its operation structure and culture. These organizations can then pass on their best practices to others who would like to excel. A risk-based approach to an organization’s operations will increase its margins than an asset-based approach. A risk based approach deals with a complete check on the firm’s strategic, financial and operation risk giving value to the firm. The first step in ERP involves risk managers sharing the types of risks within their jurisdiction. They then determine their objectives and the dangers the risks identified pose in relation to their objectives. Finally, the senior management determines the risk they are willing to absorb and the resources to allocate to achieve their objectives.
Risk identification is the most difficult step in the risk management process. It involves many processes in sorting the operations risks in the order in which they affect businesses’ profitability. It is important to get the details of the risk and pass them on to the relevant people who shall decide whether to absorb the risk or transfer it. This is the typical risk profile. There should be a consistent strategy for managing and monitoring the risks identified using the appropriate technology. A chief risk officer will monitor the risk using the business intelligence system, and give warning signs when a crisis is expected.
Summary
This article relates to operational risk in various ways. It explains the measures that organizations should take to maximize its returns despite the current economic downturn. The article proposes the Enterprise Risk Management method, which outlines the steps that a firm should follow in its risk profile. It offers a solution to maximize the operation of a business through risk assessment, identification and management.
References
Banham, R., (2009). Managing Risk, ERM: Viewing Risk as Opportunity. The Wall Street
Journal, 6, 12-14.
Bonnie, S., (2011). National Mortage News. EBSCO Host Connection, 35 (23), 7.
Terry, A., (2010). Hungary Business Forecast Report. EBSCO Host Connection, 1, 15.
