19 April 2006

The Next Wave of Operational Risk Innovation...

Today, if you are reading this blog you may have found your way here from Yahoo like tens of thousands of others have. Or maybe from another source on the web. However, when you search for Operational Risk Management at Yahoo, you get This Blog at the top of the first page of search results. Try searching on the same exact terms on Google, and the blog doesn't make the cut for the first page of search results. When you are searching for relevant information on "Operational Risk Management" (ORM), it's always important to look in more than one place and use more than one search engine. That's just life on the Internet in this age of paid advertising and mathmatical decisions on who deserves the top spots on search results.

Several years ago, there where only a few people who really had any idea what Operational Risk was all about. The US Navy / Marine Corps for one. They know that the work they performed was full of hazards and risk. If they didn't do something to systematically reduce operational risks in every process they performed or mission they executed, they knew that more people might be injured or die.

And what is the Navy's definition of ORM:

ORM is a decision making tool- used by people at all levels to increase operational effectiveness by anticipating hazards and reducing the potential for loss, thereby increasing the probability of a successful mission.

ORM is an effective tool for maintaining readiness in peacetime and success in combat because it helps conserve assets so they can be applied at the decisive time and place.

Applying the ORM process will reduce mishaps, lower injury and property damage costs, provide for more effective use of resources, improve training realism and effectiveness, and improve readiness.

At the same time, you have the Global Financial community wrestling with something called Basle:

The Basle Committee on Banking supervision has recently initiated work related to operational risk. Managing such risk is becoming an important feature of sound risk management practice in modern financial markets. The most important types of operational risk involve breakdowns in internal controls and corporate governance. Such breakdowns can lead to financial losses through error, fraud, or failure to perform in a timely manner or cause the interests of the bank to be compromised in some other way, for example, by its dealers, lending officers or other staff exceeding their authority or conducting business in an unethical or risky manner. Other aspects of operational risk include major failure of information technology systems or events such as major fires or other disasters.

The prudent Risk Manager today can see the similarities in what the US Marines and the Bankers are trying to accomplish. The good news is that the convergence of what the military has known for years and the knowledge that the bankers have gained from having their institutions fail, provides us with a vast foundation to begin the next wave of innovation.

The innovations surrounding Operational Risk Management are upon us. Now it's our duty as practitioners to "Walk the Talk" and to "Practice What We Preach". Get busy!

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