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Operational risk management (ORM) is defined as a continual recurring process that includes risk assessment, risk decision making, and the implementation of risk controls, resulting in the acceptance, mitigation, or avoidance of risk. ORM is the oversight of operational risk, including the risk of loss resulting from inadequate or failed internal processes and systems; human factors; or external events. Unlike other type of risks (market risk, credit risk, etc.) operational risk had rarely been considered strategically significant by senior management.


Four principles

The
U.S. Department of Defense The United States Department of Defense (DoD, USDOD or DOD) is an executive branch department of the federal government charged with coordinating and supervising all agencies and functions of the government directly related to national secur ...
summarizes the principles of ORM as follows: * Accept risk when benefits outweigh the cost. * Accept no unnecessary risk. * Anticipate and manage risk by planning. * Make risk decisions in the right time at the right level.


Three levels

; In Depth: In depth risk management is used before a project is implemented, when there is plenty of time to plan and prepare. Examples of in depth methods include training, drafting instructions and requirements, and acquiring personal protective equipment. ; Deliberate: Deliberate risk management is used at routine periods through the implementation of a project or process. Examples include quality assurance, on-the-job training, safety briefs, performance reviews, and safety checks. ; Time Critical: Time critical risk management is used during operational exercises or execution of tasks. It is defined as the effective use of all available resources by individuals, crews, and teams to safely and effectively accomplish the mission or task using risk management concepts when time and resources are limited. Examples of tools used includes execution check-lists and
change management Change management (sometimes abbreviated as CM) is a collective term for all approaches to prepare, support, and help individuals, teams, and organizations in making organizational change. It includes methods that redirect or redefine the use of ...
. This requires a high degree of situational awareness.


Process

The International Organization for Standardization defines the risk management process in a four-step model: # Establish context # Risk assessment #* Risk identification #* Risk analysis #* Risk evaluation # Risk treatment # Monitor and review This process is cyclic as any changes to the situation (such as operating environment or needs of the unit) requires re-evaluation per step one.


Deliberate

right , 380px , Link between deliberate and time critical ORM process The
U.S. Department of Defense The United States Department of Defense (DoD, USDOD or DOD) is an executive branch department of the federal government charged with coordinating and supervising all agencies and functions of the government directly related to national secur ...
summarizes the deliberate level of ORM process in a five-step model: # Identify hazards # Assess hazards # Make risk decisions # Implement controls # Supervise (and watch for changes)


Time critical

The
U.S. Navy The United States Navy (USN) is the maritime service branch of the United States Armed Forces and one of the eight uniformed services of the United States. It is the largest and most powerful navy in the world, with the estimated tonnage of ...
summarizes the time-critical risk management process in a four-step model: ; 1. Assess the situation.: The three conditions of the Assess step are
task loading In underwater diving, task load indicates the degree of difficulty experienced when performing a task, and task loading describes the accumulation of tasks that are necessary to perform an operation. A light task loading can be managed by the opera ...
, additive conditions, and human factors. * Task loading refers to the negative effect of increased tasking on performance of the tasks. * Additive factors refers to having a situational awareness of the cumulative effect of variables (conditions, etc.). * Human factors refers to the limitations of the ability of the human body and mind to adapt to the work environment (e.g. stress, fatigue, impairment, lapses of attention, confusion, and willful violations of regulations). ; 2. Balance your resources.: This refers to balancing resources in three different ways: * Balancing resources and options available. This means evaluating and leveraging all the informational, labor, equipment, and material resources available. * Balancing Resources versus hazards. This means estimating how well prepared you are to safely accomplish a task and making a judgement call. * Balancing individual versus team effort. This means observing individual risk warning signs. It also means observing how well the team is communicating, knows the roles that each member is supposed to play, and the stress level and participation level of each team member. ; 3. Communicate risks and intentions.: * Communicate hazards and intentions. * Communicate to the right people. * Use the right communication style. Asking questions is a technique to opening the lines of communication. A direct and forceful style of communication gets a specific result from a specific situation. ; 4. Do and debrief. (Take action and monitor for change.): This is accomplished in three different phases: * Mission Completion is a point where the exercise can be evaluated and reviewed in full. * Execute and Gauge Risk involves managing change and risk while an exercise is in progress. * Future Performance Improvements refers to preparing a "lessons learned" for the next team that plans or executes a task.


Benefits

# Reduction of operational loss. # Lower compliance/auditing costs. # Early detection of unlawful activities. # Reduced exposure to future risks.


Chief Operational Risk Officer

The role of the Chief Operational Risk Officer (CORO) continues to evolve and gain importance. In addition to being responsible for setting up a robust Operational Risk Management function at companies, the role also plays an important part in increasing awareness of the benefits of sound operational risk management. Most complex financial institutions have a Chief Operational Risk Officer. The position is also required for Banks that fall into the Basel II Advanced Measurement Approach "mandatory" category.


Software

The impact of the Enron failure and the implementation of the
Sarbanes–Oxley Act The Sarbanes–Oxley Act of 2002 is a United States federal law that mandates certain practices in financial record keeping and reporting for corporations. The act, (), also known as the "Public Company Accounting Reform and Investor Protecti ...
has caused several software development companies to create enterprise-wide software packages to manage risk. These software systems allow the financial audit to be executed at lower cost.
Forrester Research Forrester is a research and advisory company that offers a variety of services including research, consulting, and events. Forrester has nine North America locations: Cambridge, Massachusetts; New York, New York; San Francisco, California; McLe ...
has identified 115 Governance, Risk and Compliance vendors that cover operational risk management projects. Active Agenda is an open source project dedicated to operational risk management.


See also

*
Basel II Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. It is now extended and partially superseded by Basel III. The Basel II Accord was publi ...
*
Benefit risk When the actual benefits of a venture are less than the projected or estimated benefits, the result is known as a benefit shortfall. If, for instance, a company is launching a new product or service and projected sales are 40 million dollars per ...
*
Cost risk A cost overrun, also known as a cost increase or budget overrun, involves unexpected incurred costs. When these costs are in excess of budgeted amounts due to a value engineering underestimation of the actual cost during budgeting, they are known ...
* Data governance *
Fuel price risk management Fuel price risk management, a specialization of both financial risk management and oil price analysis and similar to conventional risk management practice, is a continual cyclic process that includes risk assessment, risk decision making and the i ...
*
Key risk indicator A key risk indicator (KRI) is a measure used in management to indicate how risky an activity is. Key risk indicators are metrics used by organizations to provide an early signal of increasing risk exposures in various areas of the enterprise. It d ...
(KRI) * Operational risk * Optimism bias * Risk * Risk management *
Risk management tools Risk management tools allow the uncertainty to be addressed by identifying and generating metrics, parameterizing, prioritizing, and developing responses, and tracking risk. These activities may be difficult to track without tools and techniques, d ...
*
Solvency II Solvency II Directive 20092009/138/EC is a Directive in European Union law that codifies and harmonises the EU insurance regulation. Primarily this concerns the amount of capital that EU insurance companies must hold to reduce the risk of insolv ...
* Tactical Risk Management *
Three lines of defence Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to ...


References


General


OPNAVINST 3500.39C OPERATIONAL RISK MANAGEMENT (ORM)

MARINE CORPS ORDER 3500.27B OPERATIONAL RISK MANAGEMENT (ORM)


Cited


External links


The Institute of Operational Risk
The institute provides professional recognition and enables members to maintain competency in the discipline of operational risk.
Operational Risk Institute
An association of operational risk training professionals that renders key training on Op Risk related subjects including Business Continuity.
Operational Risk Management Software
5 Essential features must incorporate in ORM Software to avoid risks.
Operational Risk Management of U.S. Insurers
How well do you understand operational Risk Management. {{Authority control Operational risk Risk management in business