Having an effective risk management system allows you to proactively manage various risks and threats that could impact your company's finances, reputation, and business continuity.
In this guide, we’ll walk you through everything you need to know about an operational risk management system—also known as the Operational Risk Management System or ORMS. You’ll learn about the different types of operational risk, the procedures, stages, and principles involved in implementing such a system, and more. Let’s get started!
What is Operational Risk?
Operational risk can be defined as the possibility of incurring losses due to human errors, technological failures, environmental issues, infrastructure breakdowns, or external events that may disrupt your company’s normal activities and prevent it from achieving its corporate objectives.
This type of risk includes legal risk but excludes reputational and systemic risks, as well as losses caused by economic, social, or political factors.
According to the Basel Committee, operational risk is “the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events.”
It’s important to note that operational risks are inherent in all systems and processes executed by humans.
💡 Tip: To manage operational risks effectively, it's best practice to use a risk management software like Pirani. This tool allows you to build customizable risk matrices, identify risks, link them to processes and controls, report incidents, and generate reports to support timely, informed decision-making for your business.
Types of Operational Risk
Classifying risks into categories makes them easier to identify and manage. Below are the seven main categories of operational risk that you should be aware of within your organization:
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Internal Fraud
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External Fraud
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Technology Failures
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Execution and Process Management
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Employment Practices and Workplace Safety
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Damage to Physical Assets
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Clients, Products, and Business Practices
1. Internal Fraud
This includes risks arising from theft, bribery, or violations of regulations committed by employees or third parties contracted by the company. These are considered internal fraud-related operational risks.
2. External Fraud
These risks originate from individuals or groups outside the organization and may involve theft, forgery, or cyberattacks.
3. Technology Failures
If your company experiences system crashes, hardware malfunctions, or software issues, it's essential to identify and assess the risks these failures pose.
4. Execution and Process Management
Errors in managing internal processes—such as transaction capture, monitoring, client reporting, documentation, and account management—can lead to significant operational risk.
5. Employment Practices and Workplace Safety
Any actions that violate labor laws or workplace safety standards can create operational risk. Pay close attention to personal injury claims or incidents of workplace discrimination.
6. Damage to Physical Assets
Unforeseen events like fires, earthquakes, or terrorist acts can threaten your company’s physical assets. Identifying potential losses or damage from such events is crucial.
7. Clients, Products, and Business Practices
Unfair competition, client harm, or misleading product information can lead to negligent or unintended breaches of compliance.
⚠️ Important: While other types of operational risk may exist, these seven categories form a strong foundation for effective risk management. Using a digital risk management solution like Pirani can help you better identify, measure, control, and monitor these risks—preventing them from occurring or minimizing their impact if they do.
7 key factors of operational risk
Operational risk factors are specific elements or conditions within an organization that can contribute to the emergence of operational risks. Here are the 7 most critical operational risk factors you need to consider:
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Human Errors
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Failures in Internal Processes
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Deficiencies in Internal Controls
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Technology-Related Issues
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Third-Party Dependency
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Economic Instability and Regulatory Changes
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Fraud Risks
1. Human Errors
One of the most common operational risk factors is human error, which occurs when individuals make mistakes due to a lack of training, distraction, stress, or mishandling of assigned tasks.
This factor can lead to procedure failures, incorrect data entry, poor decision-making, or unauthorized actions. The consequences may include financial losses, disruptions to critical processes, or exposure to legal risks.
2. Failures in Internal Processes
This risk factor arises when procedures are poorly defined, not followed correctly, or inefficient. These issues can stem from poor planning, lack of standardization, or the absence of quality control mechanisms during task execution.
Such failures can result in task execution errors, delays in delivering products or services, or undetected issues. The consequences may include customer loss, reputational damage, or even regulatory penalties for non-compliance.
3. Deficiencies in Internal Controls
Weaknesses in internal controls are a significant contributor to operational risk. These occur when control systems, supervision mechanisms, and audit functions are inadequate or improperly implemented.
Internal controls are essential to ensure operational efficiency, compliance with regulations, and protection of organizational assets. When controls are weak or nonexistent, the likelihood of fraud, undetected errors, and non-compliance increases. This can lead to financial losses, damage to organizational integrity, or regulatory sanctions.
Regular audits, control effectiveness evaluations, and proper supervision of all processes are crucial to minimizing these risks.
4. Technology-Related Issues
Technology issues include IT system failures, cybersecurity vulnerabilities, outdated software, server crashes, or interruptions in technological services that affect business continuity.
These problems can lead to data loss, service disruptions, or theft of sensitive information due to cyberattacks. Moreover, lacking robust infrastructure or using obsolete systems may slow operations or hinder real-time decision-making.
To mitigate these risks, companies must invest in regular system updates, implement strong cybersecurity protocols, and maintain contingency plans to ensure system availability and data protection.
5. Third-Party Dependency
Many organizations rely on vendors, strategic partners, or subcontractors for essential business functions. This dependency can pose risks if third parties fail to meet quality standards, delivery timelines, or service expectations.
Issues such as contractual breaches, supply chain disruptions, or service failures can directly impact operations—leading to delays, financial losses, or reputational damage. Without proper third-party risk assessments, organizations may also be exposed to fraud or operational failures.
It is critical to manage third-party relationships through clearly defined contracts, ongoing performance monitoring, and rigorous selection processes.
6. Economic Instability and Regulatory Changes
Economic uncertainty—such as recessions, currency fluctuations, or financial crises—can shift market conditions, directly affecting the profitability and sustainability of operations.
Regulatory changes, on the other hand, involve the introduction or modification of laws and regulations that impact business operations. Failure to adapt may result in non-compliance, legal penalties, or increased costs of implementation.
These factors can influence corporate strategy, operational costs, access to funding, or even the viability of certain products and services. Staying informed about economic trends and regulatory updates is essential to adjust processes, review policies, and reduce their potential impact.
7. Fraud Risks
Fraud risks involve activities like asset theft, financial misreporting, abuse of authority, or violation of internal policies and procedures.
Fraud can lead to severe consequences, including significant financial losses, reputational damage, and legal penalties. Internal fraud, such as embezzlement or fund misappropriation, can be especially hard to detect without strong controls.
To mitigate these risks, organizations must implement robust internal control systems, conduct regular audits, and foster a culture of ethics and transparency.
Key strategies to identify operational risk
Here are three key strategies for identifying operational risk in your company, enabling timely action and ensuring that potential events don’t impact your organizational goals.
1. Gather Comprehensive Information
Start by identifying operational risk factors through process reviews, self-assessments, and an analysis of the country’s economic, political, social, and environmental context where your company operates. It’s essential to collect both internal and external data to assess all potential threats.
2. Classify Each Risk
Classify potential risks and create an inventory to evaluate and establish the threat level, as well as the actions required to address them. Analyze the probability, impact, and likelihood of occurrence (high, medium, or low), and use both quantitative and qualitative indicators to regularly evaluate your operational risk profile.
3. Use Technology Tools
Using a risk management software solution helps you identify threats, set alerts, enhance analysis, optimize monitoring, and increase visibility over internal processes. Software allows you to centralize company data, fostering a risk-aware culture and providing real-time capabilities to manage risk and make informed decisions.
Core Principles of Operational Risk Management
Risk Vision
Risk management should be aligned with your company’s strategic vision. This ensures decision-making is consistent with corporate goals, fostering a culture of preparedness and agility in the face of adverse events.
Value
Define the benefits of managing operational risks in both the short and long term. In the short term, it can help reduce costs related to unexpected incidents. In the long term, it strengthens organizational stability and supports regulatory compliance, offering a competitive advantage.
Process Prioritization
Identify and prioritize the most critical processes. This allows you to allocate resources and focus efforts where vulnerabilities are greatest, ensuring a prompt response to disruptions.
Clear Roles
Assign specific responsibilities across the organization so that each team member understands their role in managing risk. Department leaders should be trained to identify and mitigate risks related to their specific functions.
Relevance
Risk management strategies should focus on business lines most affected by potential disruptive events. Evaluate the interactions between different processes and how risks in one area can affect others across the organization.
Influence
Your organization’s context matters. Both internal factors, such as company culture, and external influences, such as regulatory changes or market conditions, must be considered when assessing operational risks.
Risk Culture
Building a strong risk culture at all organizational levels is crucial. Ongoing training and proactive leadership can raise awareness about the importance of identifying and addressing risks, fostering collective accountability.
Operational Risk Management System
An operational risk management system is a best practice implemented by many corporate boards.
It’s a structured, repeatable process made up of several steps designed to improve decision-making and protect key business assets such as financial resources.
Operational risks must be identified, assessed, monitored, controlled, and mitigated. To do this effectively, your system needs an efficient monitoring process. Regular assessments will help determine whether controls are working or need adjustment, enabling timely decision-making and minimizing the frequency and scope of losses.
Operational Risk Management Policies
Operational risk management policies form the foundation for how a company identifies, manages, and mitigates risks across its operations. These policies ensure that all departments are aligned under a unified framework and comply with both local and international regulations.
By assigning clear roles—such as risk committees, business lines, and internal audit teams—a robust framework is created to support goal achievement and reduce vulnerabilities. Below are the main components of an effective operational risk management policy and their importance:
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Operational Risk Committee
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Business Lines
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Internal Audit
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Internal Procedures
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Internal Communication
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Business Continuity
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Regulatory Compliance
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1. Operational Risk Committee
The Operational Risk Committee is responsible for ensuring compliance with the established operational risk management framework. Its mission includes identifying, assessing, monitoring, and reporting the levels of risk the institution faces.
Additionally, procedures must be managed properly and aligned with both local and international regulatory requirements.
2. Business Lines
Operational risk management policies should be defined and structured according to regulatory demands and internal company criteria. Business lines are typically categorized into:
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Corporate Finance
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Sales and Trading
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Retail and Commercial Banking
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Payments and Settlements
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Services
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Asset Management
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Brokerage and Intermediation
3. Internal Audit
Internal audits must be conducted to evaluate whether the implemented corrective measures are effective and aligned with the expected outcomes.
Although internal audit is not directly responsible for managing operational risk, it plays a key advisory role by offering expert recommendations for improving the system.
4. Internal Procedures
A detailed manual must be developed outlining how operational risk management procedures will be executed, including tools, processes, and system functionalities.
The manual should identify potential risks, describe risk scenarios, and define the step-by-step response procedures in case a risk materializes.
5. Internal Communication and Awareness
Promoting a risk-aware culture is essential. All employees—internal or external—must understand the company’s operational risk management policies.
This includes regular training sessions, workshops, and informational materials that communicate the company’s vision, policies, procedures, and employee responsibilities in managing operational risk.
6. Business Continuity
Business continuity refers to a company’s ability to sustain operations during internal or external risk events that could disrupt day-to-day activities.
Organizations must be prepared to respond quickly and continue delivering services as normally as possible to avoid prolonged disruptions or losses.
7. Regulatory Compliance
The operational risk management system must comply with all applicable national and international regulations. It should also be continuously updated to reflect changes in the legal framework.
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Operational risk management framework
An operational risk management system is essential for identifying, assessing, mitigating, and monitoring the risks inherent to a company’s activities. This framework provides a structured approach to navigating operational complexities and enhancing organizational resilience.
Core Pillars of an Effective Operational Risk Framework (based on Deloitte principles):
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Risk Governance and Culture: Clearly defined roles and responsibilities, with a strong risk-aware culture aligned with corporate goals.
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Infrastructure and Tools: Access to the right technology and methodologies to proactively manage risk.
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Strategy, Policies, Procedures & Controls: Systems in place to manage risk appetite and ensure compliance.
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Evaluation, Monitoring & Testing: Regular assessments to validate the system’s effectiveness.
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Data, Metrics & Reporting: Reliable data collection and timely reports to support strategic decision-making.
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Training & Communication: Equip teams to manage risk with continuous learning and aligned messaging.
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Escalation & Resolution: Transparent processes for fast incident response and resolution.
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Reputation & External Events: Account for the impact of external threats and lessons from past events to improve risk strategies.
This comprehensive approach not only mitigates operational risks but also builds stakeholder trust through proactive and responsible risk management.
Objectives of an operational risk management system
Implementing a strong operational risk management system helps ensure the long-term stability and resilience of your business. The key objectives include:
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Promoting a risk-aware organizational culture at every level.
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Minimizing human error through process automation and ongoing training.
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Reducing the likelihood and impact of operational risk events.
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Recording and analyzing critical incidents to uncover trends and inform decisions.
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Accurately identifying risks and implementing effective controls.
An effective operational risk system enhances strategic decision-making, protects business assets, and ensures continuous, sustainable operations.
Key procedures in operational risk management
To achieve these goals, organizations must implement structured and consistent procedures:
1. Self-Assessment
Conduct self-assessments to identify critical risk areas and evaluate the effectiveness of the current system.
These assessments can uncover emerging risks and offer insights through workshops or team meetings focused on exposure and control effectiveness.
2. Event and Loss Reporting
Operational risk events and related losses must be reported by risk managers. Analyzing these events can reveal underlying risk patterns and help prevent recurrence.
3. Risk Indicators
Define Key Risk Indicators (KRIs) to monitor changes in the operational risk profile over time. Periodic evaluation allows for early detection and effective mitigation.
📥 Download our detailed guide on Key Risk Indicators (KRIs) and how to implement them successfully 👇
4. Risk Assignment in Operational Risk Management
isks must be categorized to build a comprehensive risk map for either products or services, based on business lines or associated loss events. This mapping tool offers a broad overview of all recorded risks and helps prioritize them effectively.
5. Operational Risk Management Reports
Risk management reports are crucial for monitoring operational risk controls and gaining in-depth insights into documented information.
These reports should focus on results, follow-up actions, and any corrections applied to controls or processes within the operational risk framework.
The board of directors must review and analyze these reports to approve new strategies and ensure an optimal operational risk management system.
Ideal structure for managing operational risk
Effective operational risk management requires a well-defined organizational structure. This structure ensures regulatory compliance, effective risk mitigation, and strategic decision-making. Key roles within this framework include:
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VP of Risk and Compliance: Leads the company’s overall risk strategy and ensures compliance across all departments. Oversees the effectiveness of the operational risk management framework.
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Operational Risk Unit Manager: Coordinates risk-related operations. Responsible for establishing risk policies, procedures, and tools.
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Operational Risk Director: Manages risks tied to daily operations and ensures that adequate controls are in place to prevent incidents.
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Technology Risk Director: Focuses on IT-related risks, including cybersecurity, systems, and digital business processes.
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Operational Risk Professionals: Specialized teams in charge of risk monitoring, evaluation, and analysis, and for implementing controls across business units.
This hierarchical structure ensures that every level has defined responsibilities and is focused on preventing, detecting, and resolving risks that could impact business continuity.
Maturity stages in operational risk management
Every organization has different strategic goals and levels of risk exposure. However, the maturity of operational risk management can be evaluated across five key stages:
1. Traditional Stage
In this stage, there is no formal risk management structure. Risk events are addressed reactively, and internal audit becomes overly relied upon to verify losses.
Risk awareness is limited, and the organization depends heavily on the integrity and diligence of staff and shareholders to maintain control.
2. Awareness Stage
Here, companies establish dedicated risk management units. They define clear policies, roles, and support tools. Key tools at this stage include:
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Process maps to identify and control risks
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A loss event database
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Efficiency and performance indicators
3. Monitoring Stage
Once all risks are identified, organizations start measuring their impact on business operations. Risk levels and the effectiveness of risk management strategies are closely monitored.
Key risk indicators (KRIs), both qualitative and quantitative, along with risk thresholds, are established. These indicators are consolidated in a risk dashboard (Balanced Scorecard) for performance tracking.
Risk responsibilities become decentralized, and a risk-aware culture is embedded across all departments. Monitoring no longer relies solely on compliance; responsibility is distributed among process owners.
4. Quantification Stage
At this stage, the organization has developed a deeper understanding of its operational risk exposure. Risk managers focus on quantifying risks and forecasting future events.
Advanced, data-driven analytical tools are used. The loss database built during earlier stages now provides valuable insights for decision-making.
5. Integration Stage
Operational risk management becomes a core part of the entire organization. All departments work together to quantify not only operational risks but also other risk types.
Quantification becomes essential for strategic planning and process improvement. The organization aligns its risk practices with regulatory bodies and meets Basel Committee standards.
Now you have everything you need to understand the fundamentals of operational risk management in a clear and structured way.
💬 Let us know in the comments what you thought of this guide and what other risk-related topics you'd like to explore.
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