Although financial organizations have known about operational risk since business began, it’s only been an independent discipline for the last two decades. It still took a financial crisis and the ensuing flood of regulatory and enforcement fines and actions to propel operational risk into the spotlight of the financial industry’s concerns.
The operational risk weaknesses exposed by the crash of 2008 forced the finance sector to institute more robust identification and assessment methods for risk. And, the creation of better controls and control-testing processes resulted. But, despite this, operational risk losses still remain high.
Why? And what can finance professionals do to reduce their firm’s exposure to this type of risk?
What is Operational Risk?
In the finance industry, the Risk Management Association (RMA) defines operational risk as “the risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events, but is better viewed as the risk arising from the execution of an institution’s business functions.”
While the industry has made progress since the last crisis, there are several reasons why managing operational risk is fundamentally problematic.
For example, take financial risk, which involves market or credit risk–relatively straightforward. Not so with operational risk, where many different categories and sub-categories of risk exist.
Operational risk can occur from:
- Internal factors and fraud
- Data breaches and cyber crime
- Products and business practices
- Clients, third-party vendors, and service providers
- Compliance failures
- Linked to execution and delivery
- Business disruption and natural disasters
Any risk that can disrupt or change how a company conducts its day-to-day working process is an operational risk. This would also include any threat to an organization’s reputation or finances.
The fact is that operational risk is impossible to eliminate. Unlike other risk types–market risk, credit risk–it isn’t usually deliberately incurred. But, because systems, processes, and people aren’t perfect, operational risk is ever-present.
From global financial giants to small local accounting practices and independent consultants, operational risk is a fact of life for every finance operation.
Reducing Operational Risk
The field of Operational Risk Management (ORM) focuses on diminishing risk related to the daily operations of a business. This is called operational risk mitigation.
Nevertheless, how can the average financial firm protect itself against these ever-present threats? The answer is to take a proactive approach, tighten up areas of concern, and remove known risks associated with the company’s day-to-day operations.
Successfully managing operational risk posits that predicting, preparing, and identifying potential weaknesses ahead of time will reduce risk. Streamline processes, remove friction points, and centralize communications to lessen these hazards.
While risk can never be wholly eliminated, technology has given us an arsenal of weapons to help control operational risk. But first, a firm needs a company-wide commitment to transparency and oversight of its activities and operations to manage risk successfully.
How to Get the Tools You Need
Managing risk well was easier said than done ten years ago, but now with the latest technology and tools available to the finance industry, things have changed. Today, firms can measure and manage operational risk through granular data.
The prerequisite is to set up and activate an automated system. The wisest choice should be cloud-based (for security), easy to implement, and provide both oversight and transparency.
Workflow automation has given businesses the ability to detect risk with affordable, real-time, data-driven monitoring. But first, you need to capture the data. And here, the data you need for analysis and record-keeping is all recorded, accessible through your workflow and project management platform.
What Automated Communication and Data Systems Offer
Every finance firm needs an automated data system in place. With the uptick in remote work environments, these have become critical tools for the continued functioning of finance organizations worldwide.
Within an organization, a proper communications channel is essential. Every member of the team should be able to communicate with the rest of the staff. A centralized communications hub allows all stakeholders to work seamlessly together.
Regular testing and rev of technology structures is a critical element of a company’s security measures. An automated system helps coordinate these efforts by tracking access to software, files, and third-party vendors.
In the current business environment, it’s important to tighten up security measures. Password integrity, authorized personnel status, and application of permissions tools should be regularly reviewed.
The best systems allow managers to set administrative access for specific individuals at a granular level. This protects private personal data and administration authority and controls third-party applications that may cause vulnerabilities.
Automated Software, Lockdowns, and Transparency
As the pandemic impacted the world, business continuity and disaster recovery plans were suddenly in the spotlight. Lockdowns and stay-home orders have caused companies to implement their plans revealing overlooked problems, weak responses, and unexpected consequences.
Having a primary communications hub on a shareable platform will keep your staff in the loop during business disruptions. This closed system for internal company communications is one of the essential tools provided by a workflow and project management platform.
With an electronic paper trail–automatically maintained–your business demonstrates a commitment to regulatory compliance. Guard against any legal risks by reviewing fee calculations, valuation procedures, and the accuracy of disclosures.
Due diligence has also become remote-based, requiring deeper scrutiny of third-party services and relationships.
A workflow management tool should address these problems with a range of features, flexibility, and scalability.
An application that encompasses operations and compliance control and oversight will mitigate operational risk. When your platform offers complete transparency and enhances communication, everyone becomes accountable.
Your business needs a system delivering proven advances in task, project, and workflow management in a single cloud-based tool. The perfect solution is a platform designed by finance professionals for the finance industry.
OpsCheck gives firms the ability to reduce operational risk while enhancing organizational value, security, and flexibility. Streamline your business and achieve operational excellence with OpsCheck.
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